Thread by @Big_Orrin

1. Why Trumps “drill Baby Drill” is actually not great for US crude oil producers.

I keep posting this graph and there is a reason why I do. It shows that demand for U.S. crude oil particularly light sweet crude oil is not growing. Actually in 2024 it is actually falling.

2. The reason it is all about crude oil quality and the ability of refineries to run it without compromising its throughput. It is all to do with the first important piece of equipment the crude distillation column.

3. When a refinery is designed it maximum throughput is designed using a base quality of crude oil. Much of the Med refineries are designed to run urals or Arab light crude oil or the blends that mimic them.

4. Refineries are not designed to run the same throughput for every crude oil quality because it would just cost to much to build because much of the refinery system would not be used. Operating costs would also be higher.

5. When you design the column, the product lines are the limiting factor. A CDU can only produce a maximum amount of lpg, a maximum amount of gasoline, a maximum amount of diesel and a maximum amount of residue, etc.

6. That levels is more or less determined by the composition of the design crude. Yes there is some flexibility but not a huge amount. As I said a refinery would cost too much to build if it had total flexibility.

7. So if a refinery was designed to run Urals, it could not run the same volume of shale oil because the shale oil produced much more naphtha. lpg, naphtha and gasoline than does Urals. It also produces less diesel and residue.

8. What does that mean? It means that maximum amount of LpG and gasoline will be limited to the maximum but it also means less than maximum diesel and residue. In other words total throughput falls.

It is vice versa if you tried to run WCS.

9. Less than maximum log, naphtha, gasoline while diesel and residue max out.

The biggest problem for trying to run more shale than the refinery can run is that it increases the pressure in the column. The CDU is designed to run at atmospheric pressure.

10. Trying to run too much shale means the pressure in the column increases and that means cut points (temperature) at which products are produced at become messed up and product quality across the column is messed up and needs re-run or blended which increases costs.

11. Refineries can invest to run more shale but you have to consider the age and the how much the economics really work.

I have heard many times that refineries will run more if shale gets cheaper nd replace other barrels. Well the U.S. refineries are maxed out.

12. They cannot run more so it needs to be exported. If it is not exported it will go to inventories. People will say that Is is producing more crude at moment but inventories going down, what is likely happening is medium/heavy crude is being drawn down by reduced Canadian flows

13. And light sweet in tanks going up.

The Atlantic Basin is awash in Light sweet crude. Differentials are falling with WAf despite Dangote at levels at very low levels.

14. Problem is that if refiners decide to run more light sweet crude because they are cheap it means less medium/ heavy demand which means their diffs fall and rebalance again happens.

15. Extra demand for light sweet crude only increases for short periods not permanently.

For light sweet crude oil, the market is getting more difficult for extra light sweet crude oil too. Refineries are now either located at production countries Middle East or dangote

16. It means that the refineries that will close will be in the Atlantic Basin as demand and exports demand for their products fall. That means less demand for Light sweet crude oil as well.

Refineries are also becoming more complex which means they run more medium/heavy crude

17. Those are in China and the Middle East which are underutilized and should they run more it will be medium and heavy Middle Eastern crude they run not light sweet crude oil.

18. Could demand increase perhaps if diesel demand falls. Potentially but diesel would get mixed upwards and downwards in the product slate which would limit the extra demand for light sweet crude.

19. Finally, no matter if reduce regulatory costs in the U.S., shale oil will remain one of the most expensive to produce light sweet crude oils. With it well production being short duration it means that if light sweet crude prices sink. U.S. crude will be first to go off line

20. Therefore, the Trump Drill Baby Drill policy is deeply flawed and really proves that they don’t understand that refiners control demand. Because refiners are themselves limited by their Crude Distillation column.

21. I know this because I used to design Crude Distillation columns.