By Robert Harvey and Arathy Somasekhar
LONDON/HOUSTON (Reuters) – Cuts to Mexican exports and a redirection of Canadian production are reducing the already limited supply of heavy crude oil in the Atlantic basin, driving up refinery costs, with a likely knock-on effect on industries ranging from maritime transport and construction to medium industries. Eastern power plants.
Prolonged OPEC supply cuts and international sanctions on Venezuela, Iran and Russia had already led to shortages of heavier crude, with complex refineries built to process it, such as those in the US Gulf, struggling to find supplies. cheap.
Strongly acidic crude oils produce more residual fuel oils that are processed into higher value road fuels or converted into marine fuels and bitumen.
“The combination of tighter heavy crude and fuel oil supplies as well as the seasonal increase in power generation demand is expected to increase cracks in fuel oil in the coming weeks,” Vortexa analyst Xavier Tang said, referring to the spread between the price of the raw product and the refined product.
More marine fuel oil is needed for ships making longer voyages around Africa to avoid the Red Sea area, while in the summer Saudi Arabia burns more fuel oil for air conditioning and demand also increases due to increased shipping activity. construction and road construction.
Mexico cut crude oil exports in April to facilitate greater domestic processing as it seeks to end a costly reliance on fuel imports. This further threatened sour supplies in the Atlantic basin, where refineries are preparing for the opening of the Trans Mountain pipeline expansion, which will divert more heavy Canadian crude to the Pacific.
High crude oil prices in the US Gulf soared as refiners searched for replacement supply, with Mars grade hitting a near four-year high relative to WTI on April 1, according to LSEG data.
“U.S. Gulf refineries have much more expensive Canadian feedstock through pipelines, have less Mexican product available, and as a consequence other heavy oil options are significantly more expensive,” said Viktor Katona, chief oil analyst. gross from Kpler.
In Europe, the Argus Brent Sour index – which includes the main Norwegian Johan Sverdrup index – hit a 14-month high in mid-April and still trades roughly in line with the bittersweet-dated Brent benchmark, according to the pricing agency Argus Media.
Although prices have softened slightly as Mexican domestic oil demand has increased less than expected, freeing up more space for exports, the sour market remains structurally tense.
“Global crude oil is becoming increasingly lighter and sweeter as a direct result of constrained OPEC production, while non-OPEC+ countries are supplying increasing volumes of lighter, sweeter crude oil,” said Jay Maroo, head of market intelligence at Vortexa, referring to the Organization of Petroleum Exporting Countries and its allies like Russia.
“Unless there is some major change underway from OPEC, it is difficult to see this trend reversing.”
Light and medium sweets have accounted for more than 50% of Europe’s crude oil imports since 2019, according to data from Kpler. Medium and strong acids represented just 26% of the continent’s imports in the first four months of 2024, the lowest figure since at least 2012.
BALANCING ACT
High-density, high-sulfur crude oils are more difficult to refine and therefore generally cheaper than lighter crude oil. The higher prices are a particular headache for refineries that have invested in expensive modernization units that allow them to process the heavier grades.
“The lack of heavy crude goes directly against refinery profitability and is a waste of investment for complex refineries,” said Rystad Energy vice president of oil market analysis Patricio Valdivieso.
Refineries will have to adapt to the lack of heavy crude like Mexico’s Maya by mixing in whatever other similar grades they can find that suit their setup, according to Hillary Stevenson, director of IIR Energy.
Taking advantage of the relative abundance of light crude oil could prove difficult financially and operationally for US refineries.
“If they try to go lighter, the ultimate impact would be lower profitability,” said Rommel Oates, founder of Refinery Calculator, adding that a lighter crude oil diet could impact the stability of a refinery’s downstream units.
Refineries can balance a lighter raw diet by feeding secondary units with residual fuels. U.S. Gulf refineries could process up to an extra 50,000 bpd of Mexican fuel oil to replace heavy crude, according to Francisco Gonçalves, an analyst at FGE.
However, this may not be possible for refineries in Europe, which would struggle to turn this strongly acidic fuel oil into road fuels, Kpler’s Katona added.
Before 2022, Europe’s main source of heavy fuel was Russia, but the G7 embargo on the invasion of Ukraine has cut off access to refinery feedstocks such as vacuum gas oil and straight-run fuel oil.
In northwestern Europe, crack spreads on high-sulfur fuel oil barges against Brent futures reached their highest since Jan. 4, at a discount of about $11 on Wednesday, according to pricing data from Argus Media.
“A tighter fuel oil market is certainly in play as well,” said Sparta Commodities analyst Neil Crosby.
(Reporting by Robert Harvey, Natalie Grover and Ron Bousso in London, Arathy Somasekhar in Houston and Stefanie Eschenbacher in Mexico City. Editing by Dmitry Zhdannikov and Simon Webb, Kirsten Donovan)
