The behaviour of light/heavy differentials this year has been almost counter-intuitive,with an apparent strengthening in light crude prices in January when Venezuelan crude was absent from the market, followed by a rise in heavy crude prices this spring after a surge in Middle East production. But crude price spreads cannot be explained solely by relative oil production volumes. Previous CGES studies have shown that light/heavy crude differentials can be explained largely by two key factors - supply, estimated by the relative proportions of these grades in the output slate (the supply side), and demand for heavy products, particularly residual fuel oil (the demand side). These factors pull in different directions, with spreads widening as the relative output of heavy crude rises and narrowing with stronger fuel oil demand...
