The wrong kind of oil is flooding the US market — but that could be great news for a handful of producers

Super-light crude is becoming more common in the US.
Domestic refiners are having trouble processing it with efficiency.
But some think the mismatch could end up benefitting certain US refiners big-time.

Super-light crude is flooding the US oil market, and there's little demand to meet it.

All of the industry's growth in the US over the last year was thanks to crude with a gravity above 40 on the scale, which measures the weight of a petroleum liquid compared to water, according to analysts at Morgan Stanley.

That's a problem for domestic shale explorers. Most refineries in the US are designed for heavier crude grades, around 32 API. And refiners are running out of room to process super-light shale without seeing losses.

"Domestic refiners cannot take much more of this and are close to hitting the 'shale wall,'" the analysts said.

Options to export what US refiners don't want are limited. Demand for superlight crude outside of the US is modest — Morgan Stanley estimates 15 billion barrels per day. Even in Asia, where analysts say the outlook for oil demand is the strongest, lighter US shale has to fight for market share.

Meanwhile, global prices of heavier oils are climbing. And the analysts predict that US oil explorers will soon need to lower prices of super-light crude in order to compete for market share.

But there could be an upside for some. While processing super-light crude is currently inefficient for refineries, that could change with discounts. Specifically, lower prices could benefit a handful of US refineries "disproportionately," according to Morgan Stanley.

"US refiners will essentially be 'paid-to-wait' for the price of light- and super-light crude to become discounted enough to the point where it becomes an economic option to run the crude even if it means suboptimal operations," they said.

Morgan Stanley said Delek US, a refining company based in Tennessee, would be most likely to benefit. Its facilities are set up in a way that would allow them to run discounted light oil without giving up operational efficiencies.

Next on their list were refining companies HollyFrontier and Andeavor who have light oil facilities in Texas, a center of industry growth.