REFINERY MARGIN TRACKER: USGC refiners lean on Mexico to replace heavy Russian barrels

US refiners -- particularly those on the US Gulf Coast -- are on the hunt to replace 700,000 b/d of Russian crude and refined products, especially fuel oil, needed to operate their sophisticated, high-conversion refineries efficiently, an analysis from S&P Global Commodity Insights showed April 18.

Russia's invasion of Ukraine at the end of February brought on a spate of self-sanctioning by many US refiners, followed by a formal US ban on March 8 mandated winding down their existing supply contracts with Russia.

With the loss of Russian barrels, many US refiners -- including PBF on the US Atlantic Coast and some US West Coast refiners -- have looked south to Mexico, increasing imports of Mexican crude into the US.

Mexican crude imports averaged 763,000 b/d for the week ended April 8, up from the 619,000 b/d from the week earlier, according to most recent Energy Information Administration data, despite a narrowing of the light-heavy spread between Mexico's heavy crude benchmark Maya and ICE Brent.

"The Pemex K-factor, which represents the manual component of the Maya pricing formula, was unchanged at -$6.30/b in May'22," said Matthew Blair, an analyst with Tudor Pickering Holt.

"This should keep the Maya-Brent spread around an 8.5% discount so far in Q2'22, which isn't quite as appealing as the 10.3% in Q1," he wrote.

Maya coking margins for USGC refiners averaged $27.76/b for the week ended April 15, up from the $26.25/b the week earlier, margins from S&P Global showed. USGC coking margins for Mars averaged $32.91/b, up from the $32.84/b the week earlier as exports of the medium sour have fallen off with the tighter sour crude market.

Robust Mexican imports

Blair called US Mexican crude imports "extremely robust, with [year-to-date levels] up 20% [quarter-to-quarter] and 23% [year-on-year]" even though Mexico crude production is down.

However, as Russian contracts end and volumes trickle to a halt, it is difficult to predict how heavy crude supply will play out.

As Blair notes "Looking forward, it's very hard to tell how sour crude diffs will fare given the uncertainty associated with Russia's sour crude exports, as well as what any potential response from OPEC might look like."

However, record high cracks for ULSD and jet fuel have countered the narrowing light-heavy discount, with NYH jet fuel cracks versus Brent averaging $162.80/b so far in the second quarter, compared with the $16.55/b in the first quarter, according to Platts price assessments from S&P Global.

Tight diesel markets have also propelled ULSD cracks higher, with USGC cracks versus LLS averaging $52/b so far in Q2, up from the 19.25/b in Q1, Platts assessments showed.

Mexico, Caribbean barrels replace Russian fuel oil

Russian fuel oil has been a stalwart feedstock supply source for many USGC refiners who use it as a feedstock for their cokers, including sophisticated refiners like Valero. Valero came out soon after the onset of the Russian-Ukraine conflict with a statement it would no longer buy Russian petroleum products once its contracts ended.

So as contracts wind down and the 45-day grace period provided by the ban nears an end, US customs data shows Russian fuel oil flows so far in April are averaging about 126,700 b/d. This is considerably lower than the 4.8 million barrels or 156,560 b/d in March, and about on par with February's imports of 3.4 million barrels or 121,500 b/d.

As Russian fuel oil supplies taper off, Mexican fuel oil flows have increased, reaching 4.5 million b/d or 145,700 b/d in March, with volumes through April 12 averaging 189,000 b/d.

Valero also received 233,444 barrels of Greek fuel oil in April into its Corpus Christi, Texas, refinery, its first since early October 2021. This brings total fuel oil flows from the Mediterranean region to the USGC about 77,000 b/d for the first 13 days of April, customs data showed.

About 81,000 b/d came out of Caribbean storage so far in April, with about 148,000 b/d of March barrels coming from the Caribbean and Latin America.