Looming tariffs and sanctions to support heavy sour diffs in the Americas

Americas:

• Bearish on WTI, the bullish trend will reverse as temperatures normalise and refinery maintenance peaks.
• Bearish on light sweet - medium sour spreads in the US due to looming US tariffs on Canadian crude and a potential revocation of Chevron's sanctions waiver in Venezuela.
• Bearish on Venezuelan oil production due to the new US administration taking a harsher stance against Caracas. This would boost differentials for heavy sours across the Americas.

Atlantic Basin:

• Bullish on Iraqi grades, with European buyers potentially competing with Asian refineries for Basrah Medium crude amid the impacts of the most recent US sanctions on Russia.
• Bullish on Nigerian crude prices as Dangote refinery continues to ramp up over H1 2025.
• Bearish on European gasoline in Q1 2025 amid lengthening in WAF gasoline balance and low demand season in the Atlantic Basin.

Middle East and Asia

• Bullish Russian freight: ESPO freight costs tripled since US sanctions were imposed, Urals will be seeing creeping upwards moves towards $8-9/bbl for Aframaxes.
• Bearish Middle Eastern spot differentials: The current frenzied panic buying of spot cargoes will subside once the market realizes the limits of Russian trade disruptions.
• Bullish on WTI flows into Asia: Landed WTI prices into China are now $1/bbl lower than Murban despite ballooning freight costs, light sweet arbitrage from WoS wide open.

Americas: US political decisions will strengthen heavy sours

The WTI-Brent spread narrowed to $3.32/bbl this week, bolstered by record-low temperatures across the US. However, the current cold snap is temporary, and as weather normalises later in January, WTI prices are expected to come under pressure. Adding to the bearish outlook, US refining capacity has taken a significant hit, with over 830 kbd offline over this week due to maintenance activities. Key facilities, including Phillips 66’s Sweeny, ExxonMobil’s Baytown, and Valero’s Wilmington refineries, are undergoing seasonal maintenance, significantly reducing crude intake. In Q1 2025, US crude intake is forecasted to decline by 940 kbd q/q, with USGC refineries accounting for 635 kbd of the downturn.

Compounding this, the permanent closure of LyondellBasell's 268 kbd Houston refinery will remove another key outlet for WTI. Even as refinery activity declines, US crude production continues to set records, reaching 13.6 Mbd in December, supported by the ramp-up of Shell’s 100 kbd Whale platform in the Gulf of Mexico. Although Whale’s full capacity will take months to materialise, its output will contribute to the growing availability of WTI, further pressuring prices in the weeks ahead. Higher freight rates, partly driven by recent sanctions on Russia, are expected to weigh on export economics, forcing WTI prices to weaken further to clear domestic oversupply.

US refinery runs by PADD, Mbd

Source: Kpler

The WTI-Mars spread narrowed to $0.32/bbl this week, with medium sour Mars crude approaching parity with WTI. Reduced availability of medium and heavy sour grades in the USGC continues to support Mars pricing. Refinery maintenance in the region, coupled with the addition of Shell’s Whale platform, may dampen some of Mars’ strength, but the broader tightness of sour supply in the US is expected to drive a reversal of the spread, with Mars pricing likely to push above WTI in the near term.

The outlook for Canadian heavy crude remains uncertain, with potential US tariffs on Canadian imports set to marginally impact volumes entering the USGC. This could lead to an 150 kbd increase in pipeline flows to TMX, shifting some supply away from the Gulf Coast. Mexican heavy crude availability has also decreased, adding further bullish sentiment for medium and heavy sours.

US light sweet - medium sour differentials, $/bbl

Source: Argus Media

The possibility of the US revoking Chevron’s waiver in Venezuela under the new administration represents a key geopolitical risk to global heavy crude supply. Nicolas Maduro’s swearing-in for a third term has coincided with calls from Secretary of State nominee Marco Rubio to reconsider Chevron's sanctions waiver, signalling a tougher stance on Venezuela.

Chevron’s involvement has been critical to increasing Venezuelan production. Production from its JVs rose from 50 kbd in December 2023 to 200 kbd in 2024, supporting the country's overall output above 900 kbd. Without the waiver, production could decline more rapidly than Kpler’s current base case, which forecasts output falling to 800 kbd by Q3 2025. Additionally, the loss of USGC naphtha shipments (~50 kbd) used for blending Venezuela’s ultra-heavy crude would force PDVSA to turn shift back towards Iranian condensate, an expensive and less efficient alternative given the associated 90-day journey and higher freight costs.

Should Chevron’s waiver be removed, the impact on heavy sour crude pricing in the Americas would be pronounced. The USGC, a major importer of Venezuelan grades, would face tighter supply at a time when Mexican heavy crude availability is also constrained. In Q4 2024, total US imports of Venezuelan crude averaged 275 kbd, including shipments to PADD 1.

Venezuelan oil production, kbd

Source: Kpler

Atlantic Basin: Heavier Dangote crude slate indicates further ramp up of secondary units

Houthi drone attacks on tankers in the Bab-el-Mandeb Strait began in November 2023 following the outbreak of the Israel-Hamas war and have persisted to date. The necessity of rerouting vessels via the Cape of Good Hope has reduced the number of ships transiting the Suez Canal. This is evident from the drop in the Red Sea crude transit vessel count, which fell to 157 in December 2024, compared to 200 vessels in December 2023, just as the Houthi attacks were gradually escalating. The Bab-el-Mandeb Strait is a critical transit route for Middle Eastern crude flows to the WoS. While Saudi-Europe flows remain largely unaffected (as most Saudi barrels destined for Europe are transported through the East-West Petroline and then via Egypt’s Sumed pipeline), the rerouting has primarily disrupted Iraqi flows to NWE and the Med. Most of these vessels now take the more expensive and time-consuming route via the Cape of Good Hope, more than doubling voyage times. Iraq-Europe flows (mainly Basrah Medium, 28.5,3.2) have faced pressure since the onset of the Houthi attacks, with volumes in December falling to 500 kbd, nearly 20% lower y/y. Amid reduced availability of medium sour crude, Latin American crude exports to Europe steadily increased throughout 2024, rising by 220 kbd (20% q/q) in Q4. Looking ahead, European buyers of Iraqi barrels may face higher prices as demand from Asia grows. This shift is driven by the latest US sanctions on Russian crude exports, which could prompt Asian refiners to seek similar quality alternatives to Urals.

Iraqi crude flows to Europe, kbd

Source: Kpler

After crude oil imports (including intra-country flows) to the Dangote refinery averaged 200 kbd over Q3 2024, inflows surged significantly throughout Q4, reaching 300 kbd in November and 450 kbd in December. However, refined product exports during the Oct-Dec period averaged only 180 kbd, suggesting that throughput has not increased in line with higher crude imports. We estimate Dangote’s crude intake averaged 270 kbd in Q4 and is expected to remain near 300 kbd in Q1 2025, reflecting a utilization rate of 45–50%. Regarding Dangote’s crude slate, January has brought some notable arrivals. A WTI cargo (VLCC) discharged at the refinery on 5 January, marking the first US crude delivery in four months. Additionally, a Suezmax carrying Angolan Pazflor (25.6 API, 0.4 SUL) arrived on 11 January, representing the first-ever Angolan delivery and the first time a medium sweet grade has been imported to Dangote. This shift in procurement patterns suggests that the RFCC and other secondary units are being ramped up, paving the way for increased gasoline production. Indeed, Dangote’s gasoline exports rose from zero kbd in Q3 2024 to 60 kbd in Q4.

Dangote refinery crude imports (incl. intra-regional flows)

Source: Kpler

Increasing refinery runs at Nigeria’s Dangote and Port Harcourt refineries throughout 2025 are expected to significantly lengthen West Africa’s gasoline balances. This shift will pose challenges for European refiners, with European gasoline exports to Nigeria already dropping to a four-year low of 70 kbd in December. We estimate that Dangote’s RFCC (the most critical unit for high-volume gasoline production) is currently operating at 40–45% capacity, placing total Nigerian gasoline production at above 100 kbd. Following the commissioning of key units within the gasoline block—Reformer, Isomerization, RFCC, and Alkylation—this output is reflected in the sharp reduction in residue and naphtha production. Dangote’s fuel oil exports, for instance, fell from 60 kbd in Q3 to just 6 kbd in Q4, while naphtha exports also dropped significantly q/q. Achieving higher yields and production volumes will depend on further ramping up RFCC unit rates, a milestone anticipated by late 2025. Looking ahead to 2025, increased production volumes at Dangote will reduce Nigeria’s gasoline deficit from -280 kbd in 2024 to -170 kbd in 2025 (and -100 kbd in 2026). While Dangote’s gasoline will primarily cater to domestic markets, the refinery is also poised to become a major supplier across Western, Central, and Southern Africa. Dangote’s gasoline exports rose from zero kbd in Q3 2024 to 60 kbd in Q4. Next to Nigeria, these volumes have been shipped to markets including Congo, Ghana, Angola, Cameroon, and others.

Nigeria's gasoline balance, kbd

Source: Kpler

Middle East and Asia: Skyrocketing Dubai backwardation tests the patience of Asian refiners

The drastically widening futures curve of Dubai is ratcheting up prices for Asian refiners that scramble for medium sour barrels, seeing the Middle Eastern benchmark’s M1-M3 spread soar to $4.4/bbl after the first four days of trading this week. Seeing spot differentials for Upper Zakum and Al Shaheen soar to multi-month highs and premia of $4/bbl vs Dubai swaps, the appreciation of Murban marks a concurrent trend in sourcing strategies of Indian and Chinese refiners. On January 13, Murban witnessed the third highest daily traded volume on record, seeing the odd strength in late December reappear with even greater force, sending Murban diffs vs Dubai swaps to a $2.8/bbl premium. As in the case of Dubai backwardation, this is the highest that it’s been since October 2023, the month when the Israel-Palestine conflict started. Routinely closing above same-month ICE Brent futures this week, the scramble for Murban is taking place at the same time an overall decline in Asian gasoline and naphtha cracks, indicating that it’s mostly panic buying driving the strength rather than market fundamentals. We believe that such unorthodox strength in light sour differentials is unlikely to outlast this week, with Murban moving back to its more natural $1-2/bbl premium to Dubai swaps.

IFAD Murban prompt month futures vs Dubai swaps, $/bbl.

Source: ICE.

The brunt of the Biden administration’s Russia sanctions will be carried by ESPO flows, seeing freight rates balloon on the Kozmino-NE China route whilst Urals lumpsum costs have moved upwards only marginally from a week ago. With sanctions running front and centre, the market has even failed to appreciate that December exports of ESPO reached an all-time high of 978 kbd, up one cargo compared to the previous record from October. In the first week since the imposition of US sanctions, ESPO loading out of Kozmino have maintained a relatively stable pace of one Aframax tanker per day, with every single cargo either discharging or being en route to China. That said, none of the ships involved in post-January 10 deliveries is currently on the OFAC list, so most probably sellers would be moving fixtures around to avoid a direct impact right in the first days of sanctions. Assessed at around $1.7-1.8 mln on a lumpsum basis a week ago, the freight costs of Kozmino-Northeast China have tripled in a matter of days and could edge even higher than the current fixing rates around $6 mln.

ESPO seaborne flows by destination country and FOB Kozmino prices of ESPO vs ICE Brent, $/bbl.

Source: Argus Media.

The moderate increases in Urals freight (i.e. Indian-bound Russian exports are safer because of lower exposure to sanctions) and drastic jump in ESPO transportation costs highlights the sourcing difficulties Chinese refiners will be facing over the upcoming weeks. Whilst there have been instances of spot trades of February-loading Upper Zakum cargoes, it’s mostly March programmes that are traded currently, suggesting that the earliest that Northeast China could potentially see an ESPO replacement delivered would be somewhere in May. The prices aren’t easy to handle either, with the likes of Johan Sverdrup and Tupi soaring to $5/bbl premia vs ICE Brent M3, up by more than $1.5/bbl since the issuance of sanctions. Even Congolese Djeno, trailing behind the main medium sweet grades of the Atlantic Basin for most of 2024, has finally seen a full pricing recovery and is being bid at $5.4-5.5/bbl vs the May Brent contract. Whilst FOB differentials are set to stabilize soon, the landed costs into China will continue to rise as freight spirals out of control. VLCC costs from Saudi Arabia to Northeast China effectively doubled w/w to $2.4/bbl currently, whilst VLCC freight from the US Gulf Coast will breach the $5/bbl mark relatively soon.

Landed prices of light sweet grades into northeast China vs Dubai, $/bbl.

Source: Argus Media.

‍

Want market insights you can actually trust?
‍

Kpler delivers unbiased, expert-driven intelligence that helps you stay ahead of supply, demand, and market shifts. Our precise forecasting empowers smarter trading and risk management decisions - backed by the most accurate oil price predictions two years running.

Unbiased. Data-driven. Essential.

Trade smarter. Request access to Kpler today.