The US banned Russian crude and product imports today. This was a unilateral action, so the EU has not tagged along. In 2021, US imported:
- 198k b/d of crude
- 472k b/d of product
On a weekly basis, it will result in a loss of ~1.386 million bbls in crude and ~3.3 million bbls in products.
Now crude wise, we don’t think the hit will be that meaningful. Canada can export more to the US. WCS-WTI differentials will likely further tighten benefiting Canadian gas producers more. Russia exported a heavier crude slate to the US, so this is a direct beneficiary for the friends up north.
On the product side, that’s where things are going to get interesting.
The US imported on average ~2.3 million b/d of products in 2021. Russia accounted for ~472k b/d of that, so this is not just a little meaningful in the context of petroleum products. Breaking this figure down, the areas we are going to see hit the hardest are residual fuel oil, distillate, and other oils.
Now if you look at the reaction of the market, refining margins are roofing.
That’s ~$32/bbl that refineries are making. In terms of investments, you still want to be invested in integrated producers. Take Cenovus (NYSE:CVE) or Suncor (NYSE:SU), for example, you produce at an all-in cost of $35/bbl, sell it at $101/bbl WTI, and then add another $32 on top for refining margin. You are really making close to $100/bbl.
That’s quite a ridiculous turnaround for the refining industry. In addition, because of the structural loss in refining capacity in the US, there’s no one that can overproduce, making the tight product situation that much worse.
Now there are likely other things that have not crossed my mind yet, but I can tell you with certainty a few things right now. This ban will:
- Keep US oil inventories trending bullish (e.g. down).
- Keep product storage low.
- Prompt higher refinery throughput, but capped due to structural loss.
- Record earnings from integrated oil majors.
We don’t think the administration was aware of how impactful Russian product imports really were. Time will tell, but this summer is going to be a rude awakening.