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Refinery margin tracker: Deeper OPEC+ production cuts unlikely to impact US refiners; Asia to benefit

US refiners are unlikely to be impacted by the decision by OPEC, Russia and nine other allies Friday to deepen their production cuts for the first three months of 2020, as crude imports have waned as US light, sweet crude production has risen, an analysis from S&P Global Platts showed.

The fall-off in US crude imports due to rising North American production has buffered it from the decision by OPEC+ to increase existing production cuts by 503,000 million b/d to 1.7 million b/d for January, February and March 2020.

S&P Global Platts Analytics adjusted their production expectations as a result of the cut, lowering its first quarter 2020 OPEC forecast by as much as 250,000 b/d on expectations of Saudi Arabia producing 400,000 b/d below its now-reduced quota, lower quotas for the UAE and Kuwait, and “modestly improved compliance from Iraq and Nigeria.”

Complex US refiners on the US Gulf and West coasts have the ability to run the heavier barrels. But economics have dictated that more local crudes have better value.

US imports of heavy and medium sour crudes dropped to 5.5 million b/d in September 2019, with non-OPEC nations providing 4.4 million b/d of those barrels, according to Energy Information Administration data.

Asian refiners are also unlikely to feel the pinch, as Saudi Arabia is seen as “trying to preserve Asia” as a demand center, to avoid encroachment of crudes from the US and other regions.

Also there is not much clarity yet about where the cuts will come from, particularly what grades Saudi Arabia will cut back on.

“It’s too soon to say where and what kind of grades will be cut,” said Sergio Baron, a consultant with Platts Analytics. However, expectations are lighter barrels will be the first cut to keep supply of heavy crude to Chinese and Indian refineries.

USGC DEPENDS ON MEXICO, CANADA FOR HEAVIEST BARRELS
US Gulf Coast refiners have cut back on imports of heavy crude barrels, focusing imports on barrels from Canada, Mexico and Latin America, which due to their proximity give the best economics, and increasing their runs of light domestic crudes.

USGC imported 1.7 million b/d of heavy and medium sours in September, with only 362,000 b/d coming from OPEC nations, due in part to weak economics.

The coking margin for Arab Heavy on the USGC averaged $5.66/b for the week ended December 6, compared with the $8.09/b Maya coking margin and the $15.34/b Western Canada Select coking margin.

The USGC coking for a medium sour like Mars averaged $7.13/b for the week ended December 6, compared with the $3.99/b for Arab Medium.

US WEST COAST REFINERS LOOK TO LATIN AMERICA FOR HEAVY BARRELS
US West Coast refiners have supplemented falling California heavy oil production with Latin American barrels, importing 1.1 million b/d of medium and heavy sours in September.

Of these September barrels, USWC refiners imported 122,400 b/d of medium sour Saudi Arabian barrels and 262,567 million b/d of Iraqi medium and heavy crudes, EIA data shows.

However, USWC refiners prefer Latin American crudes like Ecuador’s Napo, importing 165,000 b/d in September. Ecuador is currently a member of OPEC but will leave the organization in 2020, which will skew USWC’s current ratio of OPEC to non-OPEC crude imports.

The coking margin for Napo averaged $10.62/b for the week ended December 6, compared with $8.28/b for Arab Medium and $6.11/b for Basrah Light and $7.59/b for Basrah Heavy.

ASIA WINNER, EUROPE IN LIMBO
Saudi Arabia and Russia are the largest crude suppliers to China, which imported a record 11.18 million b/d in November, according to the its General Administration of Customs, with state-owned companies favoring Saudi Arabian crude due to some joint venture projects and independent refiners favoring Russia’s ESPO.

However, November crude imports for Chinese independent refiners fell to 2.91 million b/d on less economic margins. The coking margin for Russian ESPO in China averaged minus $3/b, for the week ended December 6.

The coking margin for Arab Heavy in China is strengthening, averaging minus $1/b for the week ended December 6, compared with the minus $2.33/b the week earlier, while Arab Heavy to Southeast Asia averaged minus 36 cents/b and minus $1.58/b in the same time period, Platts Analytics data showed.

Expectations are for European refiners to see less Saudi crude, due to weak hydroskimming margins for Arab Extra Light of minus $8.44/b for the week ended December 6.

“Simple refineries running medium and heavy sours are experiencing the worst refining margins on a historical basis, and should be the first ones to cut runs,” said Platts Analytics in a research note.

These refineries which produce HSFO are already feeling the pinch ahead of IMO 2020, which kicks in on January 1, 2020. The International Maritime Organization has mandated that the sulfur level in bunker fuel must be cut from 3.5% sulfur to 0.5%, in essence cutting demand sharply for the high sulfur fuel.

“No one wants to produce HSFO,” said Baron, the Platts Analytics consultant.
Source: Platts

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