In recent months, high levels of Urals, a medium-sour Russian crude oil, have been redirected to Asia, particularly China and India, making up for lessening exports to Europe. According to our recent analysis, Asian imports of Russian oil during April to July were 80 percent, or 0.9 million barrels (bbl) per day, higher than prewar levels.

This increased flow of Russian crude to Asia appears to be the primary cause of discounts to Asian sour-grade benchmarks such as Dubai and Oman, with prices subsequently declining relative to the global Dated Brent benchmark. As a result, there has also been a decline in relative pricing for North and Latin American crude grades—West Texas Intermediate (WTI), Western Canada Select (WCS), and Vasconia from Colombia—which has increased margins for US Gulf Coast refiners.

The widening discount for light- and heavy-crude grades from North America

The war in Ukraine has upended traditional market dynamics and crude-oil flows, significantly influencing oil price differentials. Due largely to international sanctions, extensive amounts of Russian crude are now flowing to Asian countries, predominantly China and India.

Based on current destinations, the average flow of Russian crude to Asia increased from 34 million bbl per month during the precrisis period of December 2021–March 2022 to an average of around 60 million bbl per month during April–July 2022 , an increase of 0.9 million bbl per day (Exhibit 1). Flows to China increased by 0.2 million bbl per day over the same period, rising from 24 bbl per month to an average of 31 million bbl per month. Furthermore, flows to India rose from 2 million bbl per month to 24 million bbl per month, increasing by 0.7 million bbl per day.

As a result of increased sour-crude availability in the region, Asian crude benchmarks—sour grades such as Dubai and Oman—have been discounted relative to the Brent benchmark. In fact, differentials for the sour-crude benchmark widened by $2.3 per bbl since the period of April to July (compared with the prewar December 2021–March 2022 period) . In the same period, the North American heavy-sour benchmark, WCS, saw discounts widen by $5.1 per bbl , while Vasconia (the Colombian sour grade) and WTI (the North American light, sweet crude) saw discounts widen by $1.5 and $1.4 per bbl, respectively (Exhibit 2). This discount increase suggests that it may be more profitable for refiners to process these crudes in the US Gulf Coast.

US Gulf Coast refiners are seeing an increase in margins

Margins for refiners in the US Gulf Coast region have increased as widening discounts on crude have translated to higher margins for deep-conversion refiners processing heavy crude and mid-conversion refiners processing medium and light crude.

In particular, refiners with access to WCS saw variable cash margins in heavy coking configurations rise from an average of $17.4 per bbl per day in December 2021–March 2022 to $42.1 per bbl per day in April–July 2022 (Exhibit 3). Meanwhile, refiners processing Vasconia saw variable cash margins in heavy coking configurations rise from an average of $16.3 per bbl per day in January–March 2022 to $37.3 per bbl per day in April–July 2022. Similarly, refiners processing WTI saw an increase in variable cash margins due to pricing, rising from an average $10.9 per bbl per day in January–March to an average of $28.9 per bbl per day in April–July.2

Although most of the margin increase for refiners is driven by higher absolute crude prices and tighter refining-market conditions, approximately $3 per bbl of the increase is driven by changes in crude flows since March 2022

The advantage for US Gulf coast refiners has increased since the conflict began, reflecting both an increase in absolute crude prices and tightening refining market conditions in the Atlantic basin, which is reflected in Northwest European cracking margins. Other factors supporting high margins include advantaged natural-gas pricing and advantaged logistics to supply export markets. Finally, US Gulf Coast refiners are enjoying an additional $2.6 per barrel discount for light and heavy crudes from the impact of the change in Russian flows to Asia.

Overall, these discounts are likely to be short-lived as global markets adjust by redirecting discounted crude toward other refining centers and closing arbitrages. In addition, a slowdown in global demand for refined products due to potential recessionary fears could cause a global decrease in demand for crude and shrink the advantage for US Gulf Coast refiners.

In the interim period, refiners in the Atlantic basin could try to procure these advantaged grades while they are available. To succeed in this effort, refiners could identify dislocation, act quickly, and coordinate closely with refinery, financial, and commercial teams.

Marex Media