Good for ↑
Saudi Aramco told European refiners they will get no crude for a month, setting off a rush for other supply. Poland's Orlen is already purchasing 16 extra spot cargoes. The scramble widens refining margins for US refiners like PBF Energy, HF Sinclair and Valero, whose supply is unaffected.
Source: Bloomberg ↗
When Saudi Aramco cuts off a group of buyers, they all rush to the spot market. Reuters confirmed that Poland's Orlen has already purchased 16 extra spot cargoes. As European refiners compete for West African, Norwegian and US Gulf Coast crudes, premiums on those grades rise worldwide. US independent refiners such as PBF Energy (PBF), HF Sinclair (DINO) and Valero (VLO) face no supply cut. Their complex plants can process many crude types. They serve the US fuel market, where margins widen as European rivals pay more for crude. Having no oil fields, they keep the full gain. Margin data such as the 3-2-1 crack spread (the profit from refining three barrels of crude into two of gasoline and one of diesel) takes days to weeks to show this. Investors are watching crude prices instead.
Investors see this as a story about higher crude prices. They expect it to help the big integrated oil companies with their own production, such as ExxonMobil and Chevron, and energy stocks in general. They assume higher oil prices are the main way the cutoff affects companies.
Why that may be wrong
Published refining margin data trails the spot crude market by 1-2 weeks. Analysts covering US refiners will not raise their margin forecasts until they see margins widen in that data. Meanwhile the European scramble is already under way in the physical market. By the time margin data confirms it, refining shares will already have moved. Investors also read the 3% weekly fall in US crude as bad news for all energy. For refiners, what matters is the gap between Brent and US crude, and their own margins. Both can widen even as US crude falls, if European demand bids up other crudes.
The link breaks if Saudi Aramco reverses the cutoff within days, through diplomacy or by fixing the problem behind it. It also breaks if European refiners find replacement crude from other OPEC+ members at no extra cost. Watch the gap between Brent and US crude. If it stays below $3-4 a barrel, and US refining margins stay flat or fall over the following two weeks, the link is not working.
The cutoff may be brief. Aramco may be sorting out pipeline logistics after the Red Sea attack and could restore flows within weeks, before US refining margins widen. The weakest assumption is that European refiners cannot easily swap Saudi Arab Light for other OPEC+ crude at little extra cost. If other producers fill the gap through direct deals, the spot scramble never grows large. The case for wider margins would then fail.
The closest example is Libya in 2011. The war that toppled Gaddafi removed about 1.3 million barrels a day of light, low-sulfur crude from the Mediterranean. European refiners scrambled for West African and North Sea crude. The gap between the global Brent price and US crude hit a record, about $27 a barrel by September 2011. US refiners using domestic crude earned very high margins, and Valero (VLO) reported much higher refining margins in the third quarter of 2011. In 2019, the drone attack on Saudi Arabia's Abqaiq plant briefly removed 5% of world supply. US refining stocks held up better than the integrated oil majors over the next two weeks. Regional supply shocks tend to favor distant refiners that can run many crude types.
Saudi Aramco halts crude deliveries to European refiners for the coming month. That opens an immediate gap of several hundred thousand barrels a day for European refineries.
European refiners all rush to the spot market for other crudes, from West Africa, the North Sea and possibly the US Gulf Coast. Poland's Orlen has confirmed 16 extra spot cargo purchases, and other European refiners will follow. The bidding raises premiums for light, low-sulfur crude worldwide. It also widens the gap between Brent and US crude, as non-US buyers compete for other grades.
US independent refiners that run on domestic crude face no supply cut, while their refining margins widen as global fuel supply tightens. Each dollar the gap between Brent and US crude widens adds roughly $1 a barrel of margin on domestic crude. Pure refiners running mostly US crude in complex plants gain the most. Unlike the integrated majors, they have no oil production that would offset the margin gain.
No comments yet.
Sign in to comment
Earlier connections in the same sector that share a theme with this one.