Refinery margin tracker: Margins drop as crude spikes after Iranian general was killed

New York — Global refinery margins fell late last week after news that a top Iranian general was killed by the US roiled oil markets and caused a spike in crude prices, an analysis from S&P Global Platts showed Monday.

Brent crude prices have risen almost 6%, crossing $70/b on Monday, since the US announced late Thursday that it had conducted a drone strike in Baghdad that killed Iranian Revolutionary Guard General Qassem Soleimani, who had been coordinating several Iranian-backed militias in Iraq.

Front-month NYMEX crude prices Monday hovered below the $65/b mark - the highest since April 2019 - while front-month DME Oman touched $68.98/b, as the spread between heavier sour crudes and light, sweet crudes narrowed.

"Although Iran's exports have slowed to a trickle due to sanctions, the country still produces rough 2.1 million b/d," Tudor Pickering Holt analyst Matthew Blair wrote in a research note.

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Iraq supply could also be curtailed, with its parliament passing on Sunday a resolution calling of the US troops from the country, putting them at risk for sanctions from US President Donald Trump.

Iraq produced 4.68 million b/d in November, close to 5% of global output, according to the latest Platts survey of OPEC production.

Declines in both coking and cracking for heavier, more sour crudes were more pronounced than for sweeter crudes. Northwest Europe cracking margins for Iraqi Kirkuk crude fell to minus $4.38/b on Friday, the day after the attack on Soleimani, from Thursday's minus $3.51/b.

On the US Gulf Coast, coking margins for Iraqi Basrah Light fell to minus 18 cents/b on Friday, from a 5 cent/b premium on Thursday, S&P Platts Global Analytics data showed. Cracking margins dropped to minus $12.05/b Friday from the minus $10.30/b Thursday.

"Any disruption in Iranian production stemming from the conflict could lead to tighter heavy crude sour diffs," TPH's Blair added, reversing a recent trend.

SPARE CAPACITY AVAILABLE

Iran sanctions coupled with Venezuelan sanctions and government-mandated Western Canadian production outputs limited global volumes of heavy crude supply, narrowing the price spread between heavy and light crudes and increasing runs of light, sweet crude.

In the US, Light Louisiana Sweet held a $2.80/b discount to heavier, more sour Mars in the fourth quarter 2019, compared with the $1.41/b average in the third quarter 2019. So far, the first quarter 2020 spread between the two crudes is averaging $2.73/b, according to Platts assessments.

Asian refiners have been the most impacted by the narrower light-sweet crude spread. In Singapore, the Dubai cracking margin is averaged minus $1.11/b for the week ended January 3, while the Arab Light cracking margin averaged minus $4.01/b.

However, rising crude prices could entice increased output from OPEC and their allies, who are just implementing a 1.7 million b/d production which will hold through March, when they meet to decide whether to extend the cut further.

Platts Analytics estimates global spare capacity at 2.3 million b/d, of which 1.5 million b/d is in Saudi Arabia. The country pumped 9.9 million b/d in November, a Platts survey showed, and has held below its production cut quota.

Increased tensions in Iran and Iraq could spill over to other parts of the region. Saudi Arabia's facilities could be at risk from attack as well as well as those in Kuwait, Qatar and the UAE.

-- Janet McGurty, janet.mcgurty@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com