Freight costs bolster North Sea grades while MED light sweets face oversupply

Executive Summary

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Market & Trading calls

Americas:

• Bullish on Canadian production growth as most production remains well above breakevens.
• Bullish on longer-term Canadian crude flows to China as US West Coast refineries close.
• Neutral on US crude exports as Brent-WTI spread needs to widen to incentivise higher exports. Brent-WTI spread is being held in check by low Cushing inventories.

Europe and Africa:

• Neutral on Mediterranean light sweet crude differentials as CPC and BTC exports sustain elevated flows into the region but gasoline cracks will likely improve in Europe.
• Bullish on North Sea BFOET crude differentials as high freight rates continue to dampen competitiveness from Latam and the Middle East in European markets. North Sea crudes remain a preferred choice for refiners facing higher transportation costs.
• Neutral to bearish on Angola’s heavy sweet Dalia crude until HSFO cracks recover or Asian demand improves seasonally.

Middle East - Asia - Russia:

• Bullish on flows into Shandong with ramp up of Yulong refinery.
• Bullish on Indian refining runs with improving demand through Q2.
• Neutral on physical sour diffs with bullish Aramco Trading purchases potentially offset by greater OPEC+ supply weighing on Dubai benchmark.

Americas: US West Coast refinery closures to provide a counterweight to bullish heavy sour market

With oil prices dropping to the low $60s on a WTI basis, concerns continue to swirl around US production levels. We expect that if prices remain near $60/bbl, US production will fall by year-end to around 13.1 Mbd. With a lack of momentum behind the relief rally from recent lows and given our expectations that $69/bbl on Brent (~$66/bbl on WTI) is now a strong resistance level/ceiling for oil prices after holding as support for the last three years before being broken, it raises the question of where else in the world we could see production come under pressure.

In Canada, output is currently easing lower due to spring field maintenance, but production is still tracking toward a record 5.4 mbd by December. The stability of Canadian volumes owes much to the relatively low breakevens across key production segments. Stand-alone mining operations account for ~3.3 Mbd and are largely insulated, with breakevens near $50/bbl WTI. Production involving Steam-assisted gravity drainage (SAGD) accounts for ~1.33 Mbd of production, and has an even lower breakeven, somewhere around $30-$40/bbl, given substantial upfront investment but lower operating costs. However, Canada’s shale oil production—estimated at ~350 kbd—is vulnerable. These barrels are most exposed to potential shut-ins, as breakevens sit near current price levels, and any further slide in prices may trigger output curtailments.

Canadian crude and condensate production, kbd

Source: Kpler

While production remains under threat, exports are flourishing. Loadings from the Transmountain pipeline expansion (TMX) at Westridge continue to exhibit strength, although not quite matching last month’s record pace of 530 kbd. Regarding destinations, China accounts for ~60% of barrels, while the rest typically heads to the US West Coast. Marathon’s LA refinery, the largest refinery on the US West Coast, was the leading destination last year by far. Still, this year is turning into a much more closely-contested race between Marathon LA and Chevron’s El Segundo refinery, both taking ~50 kbd. Valero’s Benicia refinery is in third place, but it was announced late last week that it would be closed early next year. This means that the ~20 kbd of mostly heavy sour Canadian crude it was taking will need to find a home elsewhere on the US West Coast, or more likely, head to China.  

As the chart below illustrates, Benicia is pulling in heavy sour Napo and Oriente from Ecuador, medium sweet crudes from Brazil, and light sour ANS from the US—as well as local Californian heavy sour barrels. The closure of the refinery in April 2026 will free up heavy sour barrels in a market that will have no trouble absorbing them, given tightening supplies in a number of key Latin American heavy sour oil producers.    

Valero Benicia crude imports by origin country, kbd

Source: Kpler

While heavy sours remain immediately in demand, light sweet US crude exports are being kept in check by a tighter Brent-WTI spread, currently close to $3/bbl. US exports of light sweet crude are just shy of last year’s pace at 3.5 Mbd, while lower medium sour Mars exports out of LOOP are dragging exports down on the aggregate: 130 kbd lower so far in 2025 versus 2024’s pace. Despite some expectations of stronger exports by the market, rising CPC blend exports out of Kazakhstan have muscled into Europe in recent months and pushed US barrels out, while tariffs from China are slamming the brakes on this trade route. As US refiners ramp up activity ahead of summer and Cushing inventories remain in check – currently only 4 Mbbls above January’s lows – the outlook for US exports remains soft in the near term, with only a significant widening of the Brent-WTI spread, a rollback in Chinese tariffs, or a disruption to competing supply likely to alter the current trajectory.      

Brent-WTI & WTI Midland-WTI Cushing spreads, $/bbl

Source: Argus Media / Kpler

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• Executive Summary
• Americas: US West Coast refinery closures to provide a counterweight to bullish heavy sour market
• Atlantic Basin: Higher freight rates support domestic grades diferentials
• Middle East and Asia: Indian demand showing potential upside in Q2

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