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London β€” European refiners are feeling the pinch from purchasing sour crude grades at higher prices, hurting already weakening refining margins as US sanctions upend traditional trade flows into the region.

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Refineries in the region are often complex and rely on a diet of heavy and medium sour crudes such as Russia's Urals, Iraq's Basrah Light, UK's Forties and Saud Arabia's Arabian Light.

But US sanctions on Iran and Venezuela's state-owned PDVSA have meant less heavy sour crude is being exported to Europe. OPEC and non-OPEC cuts are also reducing crude flows to this region, putting pressure on refining and pushing prices for medium sour crudes to multi-year highs.

"Looking ahead to April and May it will also be interesting, given that the Venezuelan is gone, and Iran waivers will [likely not be extended]," said a crude trader, adding that the crunch looks to be even more extreme in the coming months.

"Overall, heavier crudes do very well - heavy North Sea grades, Urals, also we heard heavy sweet from WAF [West Africa] are seeing good deals because the sour market is tight," he added.

Refining margins have weakened in the past month, weighed down by a weaker gasoline and light-ends complex.

Fuel oil remains unseasonably robust and middle distillate crack spreads have been strong, but demand for crudes of this quality are still in strong demand.

Imports of Iraqi crude oil such as Basrah Light and Basrah Heavy, which is very popular amid European refineries, have also been lower recently as OPEC members have been diverting some of these barrels to Asia.

"There are no destination-free Basrah cargoes at the moment coming to Europe for the end of February as they're targeting Asia," a second trader said. "And overall very little available Basrah with the spot market dead."

"And very little availability of [other sour grades]. Some [Mexican] Mayan arrived in February but with the prices now, there are views it could be too expensive," he added. "Also Colombian, no Venezuelan. It will be interesting to see what the [Iberian Peninsula] refineries do."

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If the heavy market tightens further, refineries - many of which have invested significantly in crackers and cokers - will be faced with the choice of chasing more expensive barrels or switching to a less optimal lighter crude diet, according to sources.

There are already some signs refiners are gradually sweetening their crude slates ahead of IMO 2020. The appeal of light and sweet crudes from West Africa has broadened recently due to higher middle distillate margins and viable arbitrage economics.

HEAVY CRUDE PRICES RISE

Some sour grades in Europe and the US are also being traded at premiums to sweeter crudes as the imbalance between light and heavy crude oil supplies is growing.

Differentials for Urals crude, a high sulfur grade from Russia, for example, have averaged a premium of $0.57/b CIF Augusta over the Mediterranean Dated Brent strip, S&P Global Platts data showed. Urals CIF Augusta averaged minus $1.19/b and $0.96/b in 2018 and 2017, respectively.

This compares with a lighter crude CPC Blend from Kazakhstan which has been trading at an average of minus $1.54/b this year.

In the Mediterranean, trading sources said Urals levels in the region were staying in a relatively narrow range, despite demand loosening up going into March due to upcoming maintenance work by major buyers, as the sour market, in general, remains tight.

"With not as many options, it seems like [refineries] are able to pay up for grades like Urals, or [Iraq's] Basrah - they're forced to pay up for sour material," the second crude trader said.

Kurdish KBT crude, which is also heavy and sour, has also seen a boost in differentials, with some trading sources saying it was trading at a premium of at least a dollar over the Kirkuk OSP of Dated Brent minus $2.50/b in February.

"Kurdish oil is expensive, maybe a couple dollars premium to Kirkuk, that is crazy," a third trader said. "Urals is at positive numbers, Basrah is trading at a dramatic premium to OSP and I don't see why sour should soften, demand is there but there is not much available."

-- Gillian Carr and Eklavya Gupte, newsdesk@spglobal.com

-- Edited by Jonathan Fox, newsdesk@spglobal.com