In one of the earlier posts titled “7 Reasons You Should Short Oil Now” we mentioned that Saudi Arabia could not find any buyers for the incremental 300,000 barrels of oil per day that they pumped out post Libyan crisis. This could be taken as a sign that in spite of fears about supply bottlenecks emerging due to the loss in oil from Libya, the oil market is well supplied. However, there is another side of this debate that was pointed out earlier as to why Saudi Arabia could not find sufficient buyers, and whether the oil market is really sufficiently supplied or not.
Jim Brown at Oil slick makes a great case for the Peak Sweet debate. Oil extracted from Libyan oil fields has sulfur content between 0.01 to 0.07 percent, and is classified as “very sweet” crude. This sweet crude is heavily in demand from European refineries, since they are restricted to using this type of oil due to strict pollution rules. On the other hand, crude extracted from Saudi oil fields has much higher sulfur content and is classified as “sour crude”. Although the Saudis had promised to produce excess of a “special blend” in order to compensate for the loss in sweet crude from Libya, this blend still has a higher sulfur content of 0.5 percent. Therefore, it is understandable that Saudi Arabia could not find any buyers for the excess oil that they produced, because the European refineries, which is the main market affected by the supply cut from Libya, could not buy this special blend due to a higher than tolerable sulfur content.
The Saudis might also have a hidden reason for insisting that the oil market is well supplied and blaming the recent hike on oil prices completely on speculators. Oil prices are benchmarked to the WTI and Brent, both of which are variations of light, sweet crude oil. The crisis in Libya has probably created a shortage of sweet crude which is contributing to the hike in oil prices, although the total amount of oil that is being traded in the oil futures market hints towards sufficient supplies. However, by insisting that the price hike is due to speculative behavior and not because of a real shortage in supply, the Saudis and OPEC are aiming at glossing over the fact that they do not have the excess capacity of producing sweet crude, something which they have been insisting on for quite some time now. In the process, they are able to rake in huge profits from the upsurge in oil prices, while at the same time absolving themselves from the blame of causing the price hike.