First salvo in US-China trade war to leave crude flows largely unscathed

Americas:

• Slightly bullish on WCS differentials in the short term: With the temporary suspension of US tariffs on Canadian crude, WCS Hardisty prices have shown signs of strength. However, any reintroduction of tariffs in March, coupled with increasing PADD-2 refining maintenance, could apply significant downward pressure.
• Neutral to slightly bearish on Maya differentials: While the tariff suspension provided support, ongoing U.S. Gulf Coast refinery maintenance and technical challenges at the Dos Bocas refinery may constrain upside potential for Maya crude in the near term.
• Cautiously optimistic on Venezuelan supply stability: Increased diplomatic engagement between the US and Venezuela suggests potential stability in crude exports.

Atlantic Basin:

• Bearish on medium-density crude differentials as seasonally declining European crude demand and a rise in competing flows from Brazil keep regional crude availability supported.
• Bullish on European crude imports, despite a seasonal decline in throughput, as Atlantic arbitrage opportunities become more favourable and with refiners looking to replenish depleted inventories.

Middle East and Asia

• Bearish on WTI prices and bullish on Middle Eastern grades in Asia, as China’s additional 10% tariff on U.S. crude prompts buyers to seek alternative grades.
• Bearish on Iranian crude prices, as Trump’s "maximum pressure" campaign on Iran is expected to curb some Chinese buying interest.
• Bearish on Saudi Aramco's April OSPs: The sharp hikes in March OSPs were primarily driven by Dubai backwardation rather than product cracks, which weakened across the board in Asia.

Americas: Trump’s tariff reversal supports heavy sour differentials in the short term

The Americas crude market experienced significant volatility over the past week, driven by the White House’s announcement of trade tariffs of 10% and 25% on Canadian and Mexican oil, only for President Trump to suspend these measures for 30 days following agreements with Canadian Prime Minister Trudeau and Mexican President Sheinbaum. As a result, crude market reactions have remained relatively muted. Western Canadian Select (WCS) Hardisty traded at a discount of $13.9/bbl to WTI, a modest improvement from the $14.9/bbl discount observed the previous week. The slight strengthening in WCS pricing may also reflect the robust export activity through the TransMountain Pipeline, with average exports reaching 429 kbd over the past ten days, significantly higher than the 353 kbd average between November and January.

Refining maintenance in the US is ramping up, with approximately 976 kbd of CDU capacity currently offline. However, heavy maintenance at PADD-2 has yet to commence, with only two CDUs at the Coffeyville refinery, totaling 135 kbd, currently under maintenance. The suspension of tariffs, coupled with delayed maintenance in PADD-2, is expected to continue provide short-term support for WCS differentials. However, should tariffs be implemented in early March, bearish pressure on WCS pricing could be significant, especially as PADD-2 refining maintenance is set to escalate to 680 kbd in the coming month.

WCS-WTI spread, $/bbl

Source: Argus Media

Similar to Canadian differentials, Mexican crude grades also saw support from the Trump administration’s reversal on tariffs. Maya crude’s differential to WTI Houston improved by $0.50/bbl, settling at a discount of -$7.72/bbl. However, Mexican oil exports fell to their lowest monthly level on record in January, averaging just 535 kbd, a decline of 400 kbd m/m. The most pronounced drop occurred in the week beginning January 20, when shipments fell to only 200 kbd, with no exports from the Dos Bocas port, potentially indicating more test runs at the refinery.

Meanwhile, President Sheinbaum has officially acknowledged technical difficulties at the new 340 kbd Dos Bocas refinery, citing high salt levels in the crude, which could lead to corrosion within the refinery system. Although crude shipments have rebounded recently, with the 10-day moving average standing at 1.2 Mbd, ongoing maintenance at USGC refineries will reduce PADD-3 refinery runs by an additional 260 kbd in February m/m. This will likely limit Maya crude differentials until the Dos Bocas refinery demonstrates consistent operational improvements.

Mexico oil exports by grade, kbd

Source: Kpler

Despite continued harsh rhetoric from US Secretary of State Marco Rubio, who recently labelled several Latin American leaders, including Venezuelan President Nicolas Maduro, as “enemies of humanity,” diplomatic engagement between Washington and Caracas has increased. In the past week, Venezuela released six detained Americans, following a meeting in Caracas between Trump’s special envoy Richard Grenell and President Maduro. Discussions reportedly included the issue of returning illegal immigrants.

Chevron CEO Mike Wirth has also confirmed ongoing discussions with the US administration regarding the renewal of the company’s operating license in Venezuela. Given that Canada and Mexico are the primary suppliers of heavy sour grades to the U.S., any decision by the Trump administration to impose tariffs on these nations could complicate its stance on Venezuela. The interplay between trade policy and diplomatic relations suggests that strong measures against Venezuela are unlikely until a longer-term trade agreement is reached with Canada and Mexico.

Venezuela oil exports by destination country, kbd

Source: Kpler

Atlantic Basin: Seasonal decline in European demand to lift crude availability over H1, refilling depleted crude stocks

European sweet-sour spreads continue to remain supported, with the European medium sour benchmark Johan Sverdrup hovering at a slight premium versus North Sea Dated at the time of writing. Johan Sverdrup settled at a multi-month high of around $1.20/bbl this week and has remained in premium territory since mid-January (see chart below). This is coming at a time when European crude demand is coming increasingly under pressure amid a rise in seasonal refinery maintenance, with some 1.5 Mbd of primary distillation capacity expected to remain offline this month (IIR). Some support for medium-density grades has been coming from a decline in heavier exports from the Middle East, which has been keeping European medium-density crude markets tighter, with relatively stable middle distillate cracks across NWE (hovering around $18-20/bbl) providing additional support. Nevertheless, refinery maintenance is forecasted to average 1.7 Mbd in March and 1.9 Mbd in April, which will keep a lid on European crude demand in the months ahead, pressuring demand for Johan Sverdrup. Additional downward pressure for the latter benchmark should come from a rise in exports from Brazil, which is ramping up crude production from several new FPSOs.

Regional sweet-sour spreads, $/bbl

Source: Argus Media

A rise in uncertainty regarding Donald Trump's policies, as well as potential tariffs on various countries, has been keeping WTI Houston volatile compared to Brent this month, with the spread between both grades currently hovering around $4.30/bbl (see chart below). Nevertheless, WTI Houston is expected to come increasingly under pressure over the next months, which should result in a widening of this spread and lead to more favorable arbitrage opportunities in the Atlantic basin. This should lead to relatively stable US crude exports to Europe, despite the expected decline in demand over the next months, with flows via this route averaging between 1.9-2 Mbd recently. Whilst the threat of tariffs on Mexico and Canada has supported WTI over the last weeks, it remains unlikely that such a scenario will materialize over H1, given that both countries have shown their willingness to comply. Moreover, China’s tariffs on US oil imports are likely to also weigh marginally on demand for WTI, with China importing around 100-300 kbd. This is coming at a time when the closure of the 270 kbd Houston refinery will be keeping the availability of WTI supported, too. The latter, coupled with the fact that European crude demand will come under pressure over the next two months should see WTI weaken compared to Brent.  

Brent versus WTI spread, $/bbl

Source: Argus Media

Global crude stocks have been coming increasingly under pressure this month, with onshore inventories falling 3.25 Bn barrels in early February. Some downward pressure has also been coming from Europe, where crude stocks have fallen by around 5 Mbbls since early January and are hovering around 325 Mbbls at the time of writing. As highlighted above, some downward pressure on regional crude stocks has been coming amid a decline in exports from the Middle East. Nevertheless, a rise in European refinery maintenance in the months ahead, coupled with an expected uptick in flows from Brazil to Europe and the startup of Norway's Johan Castberg field, should provide upward support to crude availability, lifting European crude stocks higher in the months ahead.

European crude stocks by country, Mbbls

Source: Kpler

Middle East and Asia: First salvo in US-China trade war to leave crude flows largely unscathed

While the U.S. held off on imposing tariffs on Canadian and Mexican imports, it went ahead with blanket tariffs on Chinese goods. Beijing wasted no time in responding, announcing retaliatory measures on Tuesday, including levies on a range of energy products—crude oil among them—set to take effect on February 10. While there is still room for the two superpowers to negotiate a reversal, the additional 10% tariff on U.S. crude imports is unlikely to cause significant damage to either side if enforced.

China imported 178 kbd of U.S. crude in 2024, making up just 1.7% of its total seaborne imports. Slightly over a third of the U.S. crude shipments to China were light sweet WTI, while another third consisted of medium sour Mars crude, with the rest including grades like ANS, Thunder Horse, and Southern Green Canyon. While U.S. crude struggled to compete with Middle Eastern grades like Murban for most of 2024, the new 10% tariff will some $8/bbl to import costs, further dampening buying interest from Chinese refiners. Instead, China is expected to purchase more Middle Eastern crude to replace Mars and increase imports of West African or Kazakhstan’s CPC Blend in place of WTI, especially as the Brent benchmark faces pressure with more U.S. crude likely being redirected to Europe. The Brent dated-to-frontline (DFL) price dropped to a one-month-low of $0.59/bbl on Monday. Meanwhile, other Asian countries such as South Korea, Taiwan and India, are also likely to snap up more US cargoes.

China’s imports of Iranian crude oil plunged to a two-year low of 847 kbd in January, as tougher U.S. sanctions on Iranian oil tankers, introduced in late 2024, continued to curb the trade flows, while a preemptive ban announced last month by the Shandong Port Group added further complexity on shipping. As highlighted in a previous report, Iranian oil carried by tankers under U.S. sanctions appears to be unloaded at ports in southern China, such as Zhoushan and Huizhou, before being transported to end buyers in Shandong. This additional journey inevitably increases freight costs, likely shared by both sellers and buyers.

On Tuesday, US President Donald Trump directed the Treasury Secretary to impose 'maximum economic pressure' on Iran, a move expected to result in tougher sanctions on vessels, middlemen, financial institutions and port operators facilitating Iranian oil trades. Some buyers, particularly larger Chinese privately owned refiners, are likely to steer clear of such dealings as a precaution in the near term. Iranian Light crude is currently trading at around -$1/bbl against ICE Brent, a discount last seen in June 2022. With Chinese teapots cutting run rates to around 45% amid thin margins, Iranian Light prices may have hit a ceiling and could come under renewed downward pressure, especially amid rising sanction risks.

China’s imports of Iranian crude/co by destination, kbd

Source: Kpler

Saudi Arabia’s national oil company Saudi Aramco started the March cycle of OSP setting, hiking formula prices across the board. Considering that every single product crack in Asia saw m/m declines in January (both when looking at monthly averages and averages of the last week of the month), the main driver of OSP hikes was Dubai backwardation, with the cash-to-futures spread rising to its highest since October 2022. The $2.51/bbl m/m change would certainly feel in line with Saudi Aramco’s March OSP moves, hiking Arab Light and Arab Medium by $2.40/bbl and $2.50/bbl, respectively. First, hiking Arab Heavy by a larger extent that Arab Light isn’t really a reflection of Asian product cracks, at best it could reflect lower Heavy availability in March once Jizan is back from maintenance (having started with a purely Arab Medium intake, the 400 kbd refinery is now taking in a lot more ARH). Moreover, declining coking margins in Asia would not necessitate a huge upswing in buying per se, in fact for anyone that has enough inventories in place to endure the current period of ballooning differentials the best strategy would be to just wait it out and then nominate a lot into the April cycle. The April OSPs are almost guaranteed to see a notable decline – if we go simply by Dubai M1-M3 spread changes, there’s at least $1.5/bbl in the making now that panic buying is largely over, with further potential for declines once the market starts to see Russian supply reappearing in places it wasn’t available in January.

Saudi Aramco's formula prices for Asia-bound cargoes vs Oman/Dubai, $/bbl.

Source: Saudi Aramco.

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