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Changing Crude Flows are Creating Opportunities in the US Gulf Coast

Refiners in the US Gulf Coast are seeing a wider discount for light and heavy crude grades from Latin and North America due to the rising flow of medium-sour Urals oil from Russia to Asia.

To offset declining shipments to Europe, large amounts of Urals, a medium-sour Russian crude oil, have been diverted to Asia, namely China and India, in recent months. Our new study shows that from April to July, Asian imports of Russian oil were 80% greater than prewar levels. Discounts to Asian sour-grade benchmarks like Dubai and Oman seem to be primarily caused by this increasing supply of Russian oil to Asia; as a result, prices have declined in comparison to the global Dated Brent benchmark. As a result, US Gulf Coast refiners’ margins have grown due to a decrease in the relative pricing of North and Latin American crude grades, such as West Texas Intermediate, Western Canada Select, and Vasconia from Colombia.

Oil price differentials have been considerably impacted by the war in Ukraine, which has upset conventional market dynamics and crude-oil flows. Large volumes of Russian oil are currently going to Asian nations, namely China and India, as a result of international sanctions.

According to existing destinations, the average monthly flow of Russian crude oil to Asia grew by 0.9 million barrels per day during the precrisis period of December 2021–March 2022, from 34 million barrels per month to an average of almost 60 million barrels per month during April–July 2022 (Exhibit 1). During the same period, flows to China increased by 0.2 million barrels per day, from 24 barrels per month to an average of 31 million barrels per month. Additionally, flows to India increased by 0.7 million barrels per day, from 2 million barrels per month to 24 million barrels per month.

Asian crude benchmarks—sour grades like Dubai and Oman—have been undervalued in comparison to the Brent standard due to the region’s growing supply of sour oil. In actuality, compared to the prewar December 2021–March 2022 period, differentials for the sour-crude benchmark expanded by $2.3 per barrel between April and July. During that time frame, discounts increased by $5.1 per barrel for the North American heavy-sour benchmark, WCS, and by $1.5 and $1.4 per barrel for the Colombian sour grade Vasconia and the North American light, sweet crude WTI, respectively (Exhibit 2). This increase in the discount implies that processing these crudes in the US Gulf Coast would be more viable for refiners.