Changing Crude Flows Create Opportunities on the U.S. Gulf Coast

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In recent months, high levels of Urals, a medium-sour Russian crude oil, have been redirected to Asia, particularly China and India, offsetting lower exports to Europe. According to our recent analysis, Asian imports of Russian oil from April to July were 80%, or 0.9 million barrels (bbl) per day, above pre-war levels.1

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

The growing rebate for North American light and heavy crude grades

The war in Ukraine has disrupted traditional market dynamics and crude oil flows, significantly influencing oil price differentials. Largely due to international sanctions, large quantities of Russian crude are now flowing to Asian countries, mainly China and India.

Based on current destinations, the average flow of Russian crude to Asia has fallen from 34 million barrels per month in the pre-crisis period of December 2021 to March 2022 to an average of around 60 million barrels per month. from April to July 2022, an increase of 0.9 million barrels per day (Figure 1). Flows to China increased by 0.2 million barrels per day over the same period, from 24 million barrels per month to an average of 31 million barrels per month. In addition, flows to India increased from 2 million barrels per month to 24 million barrels per month, increasing by 0.7 million barrels per day.








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



Changing Crude Flows Create Opportunities on the U.S. Gulf Coast





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U.S. Gulf Coast refiners see increased margins

Margins for refiners in the U.S. Gulf Coast region increased as rising crude discounts translated into higher margins for deep-conversion refiners processing heavy crude and medium-conversion refiners dealing with medium and light crude.

In particular, refiners with access to WCS have seen their variable cash margins in heavy coker configurations fall from an average of $17.4 per barrel per day in December 2021 to March 2022 to $42.1 per barrel per day. day in April to July 2022 (Figure 3). Meanwhile, refiners processing Vasconia have seen their variable cash margins in heavy coking setups fall from an average of $16.3 per barrel per day in January-March 2022 to $37.3 per barrel per day in April-July 2022. Similarly, refiners processing WTI saw increased price-driven cash margins from an average of $10.9 per barrel per day in January-March to an average of $28.9 per barrel per day in April-July.2



Changing Crude Flows Create Opportunities on the U.S. Gulf Coast - Exhibit 3





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Although most of the increase in refining margins is due to higher absolute crude prices and tighter refining market conditions, about $3 per barrel of the increase is due to changes in crude flows since March 2022 (Table 4).



Changing Crude Flows Create Opportunities on the U.S. Gulf Coast





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The advantage to U.S. Gulf Coast refiners has increased since the start of the dispute, reflecting both an increase in absolute crude prices and tighter refining market conditions in the Atlantic Basin, which is reflected in the crack margins of North-Western Europe. Other factors supporting strong margins include favorable natural gas prices and advantageous logistics to supply export markets. Finally, U.S. Gulf Coast refiners are getting an additional $2.6 per barrel rebate for light and heavy crudes due to the impact of changing Russian flows to Asia.

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Overall, these discounts are likely to be short-lived as global markets adjust by redirecting discounted crude to other refining hubs and closing arbitrages. In addition, a slowdown in global demand for refined products due to potential recession fears could lead to lower global demand for crude and reduce the advantage of US Gulf Coast refiners.

In the meantime, refiners in the Atlantic basin could try to source these advantageous qualities while they are available. To succeed in this effort, refiners could identify dislocations, act quickly, and coordinate closely with refining, finance, and business teams.

Tim Fitzgibbon and Anantharaman Shankar are senior subject matter experts from McKinsey’s office in Houston, where Luka Vukomanovic is a consultant.

1 International Trade Center (ITC) Trade Map; vessel tracking data monitored by Bloomberg.
2 McKinsey Energy Insights.

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