Lina: Hello, and welcome to Argus "Crude Report," a podcast where we look at the recent market trends. And obviously, the topic of our conversation this week will be the Mideast Gulf War. My name is Lina Bulyk. I am a deputy editor of Argos Crude Report here in London. And today, I am joined by Ellanee Kruck, our Mediterranean reporter. Hello, Ellanee.
Ellanee: Hi, Lina. Nice to be here.
Lina: Thanks for joining me. And we will be talking about the implications of the Mideast Gulf War on European markets, because those are the markets that we keep an eye on every day, and obviously, the immediate fallout for Asian refiners was much, much larger than that for European refiners because of how reliant refiners in Asia Pacific are on the Mideast Gulf crude because of the geographical proximity. But we already see some fast and quite sharp implications for European refiners. And probably the biggest one is the gap in Iraqi supply to Europe that we are about to feel. Right, Ellanee?
Ellanee: Yeah. So Mediterranean European refiners are anticipating a loss of about 600,000 barrels a day of Basrah crude. The majority of that will be medium-sour Basrah Medium, but there will also be a more heavy-sour Basra Heavy loss. We haven't necessarily seen that in the initial first weeks of the conflict because a lot of the cargoes that are now arriving in the region had cleared the Strait of Hormuz before the outbreak of the war. But as the last few of those cargoes arrive in the next few weeks, the region is going to see a massive loss in their medium-sour supply. We've also obviously had the intermittent halting of the pipeline carrying Iraqi Kirkuk from Northern Iraq to Turkey's Ceyhan port, which has also left a hole in supply of March loading heavy-sour Kirkuk. And so, yeah, we're about to see a major issue with medium-sour and heavy-sour crude supply in the Mediterranean and Northwest Europe.
Lina: So about Iraqi Kirkuk, as far as I recall, that crude has become much heavier after it was restarted last year. So it was not of that much interest to Mediterranean refiners, right?
Ellanee: Yeah, definitely. So, previously, before the halt in 2023, it was classed as a medium-sour. But since its restart in October last year, it was seen as more of a heavy-sour crude. Many Mediterranean refineries can't take it as they're not set up to refine it. But that now actually might be one of the benefits of the crude, that it's a heavier crude, because it can replace things like Basrah Heavy, Arab Medium, Arab Heavy from Saudi Arabia. We were hearing that, from April loading, Saudi Aramco will only be exporting Arab Light to the region, and so this could be helping to kind of shore up some of that heavy-sour supply that some refiners will be missing as we go into bitumen season.
Lina: Right. And so just to make it clear, Arab Light is called Arab Light, but it's actually medium-sour crude, right?
Ellanee: Yes, deceiving name, but it's actually a medium-sour.
Lina: Right. So Saudi flows in the foreseeable future, so in the April cycle, doesn't seem to be impacted to Europe so much, right?
Ellanee: Yeah. So the good thing for Mediterranean European refiners is our Saudi supply has not been directly impacted by the effective closure of the Strait of Hormuz. This is because most supplies go from the East-West pipeline, come out of Yanbu on the Red Sea, and then exported up into Egypt through the SUMED pipeline from Sidi Kerir straight into the Mediterranean. Refiners were initially worried and concerned that the Asia Pacific demand from Yanbu as Aramco put more supplies coming out of Yanbu to avoid the Strait of Hormuz that that could start to impact the capacity and what they were able to receive in April.
However, what we've heard from refiners is, actually, Aramco will be kind of fulfilling their contractual obligations in the April loading cycle, and everything is at kind of a typical level that we'd be expecting for this time of year. We were also hearing, however, that a lot of refiners had kind of hedged their bets at trying to nominate higher quantities of Arab Light crude just so they had some of this term supply shored up, ready for the potential loss of other crudes down the line. And Aramco has rejected that and said there was a shortfall of 13 million barrels between what was nominated by Mediterranean refiners and what was allocated by Aramco, although this was not directly confirmed.
Lina: But that was more about refiners trying their luck, basically, right?
Ellanee: Yes.
Lina: So it's not a drop in supply versus normal volume so far?
Ellanee: No, definitely not. It's just that they were trying their luck for more crude.
Lina: Right, which is only fair. But it means that Saudi crude will not be there to plug a gap left by missing Basrah supplies, right? So, what are the options for Mediterranean refiners?
Ellanee: So Mediterranean refiners don't have that many options for local medium-sour supplies since Russian Urals exports have halted to the region due to sanctions. There is Kazak KEBCO. It's another medium-sour grade. However, exports are less than 200,000 barrels a day. So they're nothing that would be able to kind of fill that gap that Basrah has left. The majority of them already go to the Mediterranean, and so it's unlikely that this could be a supply that the region could rely on.
We also have Libyan medium-sweet Es Sider. The majority of this already goes to the Mediterranean, and so there's a smaller amount of supply that goes to Northwest Europe and Asia, which could be redirected to Mediterranean refiners. But prices are already at record highs as people kind of try and take up that availability for April loading crude. And so it's unlikely that that also will be able to fill the gap left by Basrah.
Lina: And how about Kirkuk? So if, as we hope, Kirkuk will be flowing in full volumes to the Turkish port, which means it doesn't have to exit the strait, like, will that help Mediterranean refiners?
Ellanee: I mean, there's definitely hope from refiners that that will be able to help some of this medium-sour supply haul because Kirkuk can be taken and blended with lighter grades, such as Algerian Saharan Blend, Caspian CPC Blend, in order to make a more medium-sour alternative. However, we've been seeing rocketing prices for light crudes in the region as well. So it's unlikely that that will be as economical as it was previously to do that.
Lina: But probably nothing will be as economical because all the prices are rocketing. So we see exactly the same in Northwest Europe, which is expected to be much less affected by the shortage of Basrah, because only something, like, 200,000 barrels a day was going to us, right? And we still have medium-sour Johan Sverdrup produced in the region. Although the operators said that the total output of Johan Sverdrup will be declining this year compared to the previous year, because the field has been on stream for some years now, and it's a natural thing that the output eventually starts to decline. And the new phase of production, so, like, new wells and new capacity, is not expected until the next year. So we will see a bit of a drop in Johan Sverdrup output.
But there is also Grane produced in the region, and in a very timely manner, Norway started up the new grade Johan Castberg last year, which is now up to something, like, 200,000 barrels a day, or that ballpark. That is a medium-sweet crude, so it is quite different from what Mideast Gulf producers were supplying to Europe. But that grade has very high yield of diesel, which is what refiners would be looking for at this time. But yes, prices for many grades have hit record highs or the highest levels in some years for those grades that have been around for longer than five, six years.
And the same is basically the case with WTI. As you mentioned, Asian refiners are trying to get any long-haul supplies that are cheaper than Murban, which has pushed prices for delivery to Europe by so, so much. And unlike some other grades, Europe still cannot avoid buying WTI because it has been the biggest grade in European side in the last few years, at least since 2022. So that is the cost of the global shift in crude flows that European refiners will have to pay.
Ellanee: And in terms of other light crudes available to Europe and the Mediterranean, I guess long-haul crude would be quite problematic given the structure of Dated.
Lina: Exactly. So at the start of the war, we were hearing that Latin American grades would be a to-go option for European refiners because those are somewhat similar in quality, at least in terms of gravity, to Mideast Gulf grades. But the problem is that, first, we have Asian refiners who are in much more despair than European refiners are just yet, and they are ready to pay very wide premiums for Latin American grades. And the second thing is that, because the war has sent the market in such a wide backwardation, it means that any long-haul crude suddenly becomes very expensive, because between the time when the crude loads and the time when you, as a refiner, get your crude, it loses so much of its value.
And this month, so far, we've been hearing that some refiners in Europe have been enjoying the very wide margins for at least some of the products because prices for certain fuels, like diesel, skyrocketed, because Europe had been importing a lot of that from other regions. And now there is a global tightness. But going forward, some people think that this situation might be not sustainable because of the structure of the market. So you have to buy a very expensive crude now. But from the current perspective, it looks like, by the time you will actually refine, crude margins might be much weaker and will not cover your expenses for the feedstock. So it might be a big challenge for European refiners in the coming weeks.
Ellanee: I guess the biggest difficulty at the moment for refiners is things change day by day, and so we're certainly keeping our eye on the situation. But I think it's very hard to predict what's going to happen in the future.
Lina: Of course. So we would love to hear from you whether you have any questions, any information to share, any thoughts. We always appreciate those. Thank you very much, Ellanee, for joining me.
Ellanee: Thank you for having me.
Lina: And you can find more analyses on the topics that we discussed today and on any other crude-related topics in our daily Argus Crude Report, in our dedicated publications like Argus Global Markets, and of course, on our online platform, Argus Direct.
