The Global Energy Research Report of BofA Merrill Lynch Global Research states that as they had anticipated last year, light-heavy crude oil spreads have blown out in recent weeks. The Canadian bitumen prices sank into single digits for almost a full month, as light-spreads widened on a bear crude market. The problem is not limited to Canada alone as heavy crude oil grades around the world have not fared much better, as diverging crude and petroleum product supply and demand trends have led to wider light-heavy crude spreads across most regions.

The pressure on heavy oil producers has become so intense that many are unable to even cover operating cash expenses, sowing the seeds of temporary relief for light-heavy spreads. The report sees a hefty oil sands maintenance season coming up in the next three months. The announced OPEC output freeze is also expected to help. Credit problems in Venezuela and elsewhere keep mounting, while placing heavy oil output at risk. The risk of recession has increased and could lead to tighter light-heavy spreads near-term.

The report states that heavy will weaken against light oil in the medium term as crude gravity drops and demand for light petroleum products keeps rising. As OPEC wages a price war against non-OPEC, the non-OPEC supply is predicted to fall over the next two years and seen to only recover 2015 levels by 2020. This implies that OPEC supply should increase as Iran makes a comeback and Saudi extends its market share grab. Thus, gravity for the average barrel is likely to fall structurally and keep pressing light heavy spreads down to levels last seen in the mid-2000s.