Prolonged OPEC supply cuts and international sanctions on Venezuela, Iran and Russia had already led to shortages of heavier crude, with the complex refineries built to process it, such as those in the U.S. Gulf, struggling to find cheap supplies.
Heavy-sour crudes yield more residual fuel oils that are either upgraded 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 rise in power generation demand is expected to push up fuel oil cracks in the weeks ahead," said Vortexa analyst Xavier Tang, referring to the spread between the price of crude and the refined product.
More marine fuel oil is needed by ships making longer voyages around Africa to avoid the Red Sea area, while in summer Saudi Arabia burns more fuel oil for air conditioning and demand also increases from higher construction and road-laying activity.
Mexico cut crude exports in April to facilitate higher domestic processing as it seeks to end a costly dependency on fuel imports. That further threatened sour supply in the Atlantic basin where refiners have been preparing for the opening of the Trans Mountain pipeline expansion which will divert more heavy Canadian crude to the Pacific.
Heavy crude prices in the U.S. Gulf soared as refiners sought replacement supply, with the Mars grade hitting a near four-year high against WTI on April 1 according to LSEG data.
"U.S. Gulf refiners have a much more expensive Canadian base feedstock via pipelines, they have less Mexican available, and as a consequence other heavy-sour options are significantly more expensive," said Viktor Katona, lead crude analyst at Kpler.
In Europe, the Argus Brent Sour index - which includes Norway's flagship Johan Sverdrup grade - hit a 14-month high in mid-April and is still trading roughly in line with light-sweet benchmark dated Brent, according to price agency Argus Media.
Although prices cooled slightly as Mexican domestic crude demand rose by less than expected, freeing up more for export, the sour market remains structurally tight.
"The global crude slate is getting increasingly lighter and sweeter as a direct result of constrained OPEC production, meanwhile non-OPEC+ countries are supplying growing volumes of lighter, sweet crude," said Jay Maroo, head of market intelligence at Vortexa, referring to the Organization of the Petroleum Exporting Countries and its allies such as Russia.
"Unless there is any major change in course by OPEC, it's hard to see that trend reversing."
Light and medium-sweets have accounted for more than 50% of Europe's crude imports since 2019 according to Kpler data. Medium and heavy-sours made up just 26% of the continent's imports in the first four months of 2024, the lowest since at least 2012.
BALANCING ACT
High-density, higher-sulphur crudes are harder to refine and therefore usually cheaper than lighter oil. The higher prices are a particular headache for refiners who invested in the costly upgrading units that allow them to process the heaviest grades.
"The lack of heavy sour crudes goes directly against refinery profitability and it is a waste of capex for complex refineries," said Rystad Energy's vice president of oil market analysis Patricio Valdivieso.
Refiners will have to adapt to a lack of heavy crude like Mexican Maya by blending any other similar grades they can find that would suit their configuration, according to Hillary Stevenson, director at IIR Energy.
Taking advantage of the relative abundance of light crudes could prove financially and operationally difficult for U.S. refiners.
"If they try to go lighter, the end impact would be lower profitability," said Rommel Oates, founder of Refinery Calculator, adding that a lighter crude diet can impact the stability of a refinery's downstream units.
Refiners can balance a lighter crude diet by feeding residual fuels into secondary units. U.S. Gulf refiners could process up to 50,000 bpd extra of Mexican fuel oil to substitute heavy crude, according to FGE analyst Francisco Goncalves.
That may not be possible for Europe's refineries however, which would struggle to process such heavy-sour fuel oil into road fuels, Kpler's Katona added.
Prior to 2022, Europe's main source of heavy fuel was Russia, but the G7 embargo over its invasion of Ukraine has cut off access to refinery feedstocks such as vacuum gasoil and straight-run fuel oil.
In Northwest Europe, high-sulphur fuel oil barge crack spreads against Brent futures hit their highest since Jan. 4 at around an $11 discount on Wednesday, according to Argus Media price data.
"A tighter fuel oil market is surely also at play," said Sparta Commodities analyst Neil Crosby.
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