U.S. Gulf Coast refiners gain from wider heavy crude discounts

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Gulf Coast refiners benefit

Highlights

Freight rates for shipping crude from the U.S. Gulf Coast to Asia surged to $30–$35 per barrel from around $5 a year ago, widening heavy crude discounts.
U.S. Gulf Coast refiners, processing over 70% heavy crude, saw third-quarter margins more than double as discounts on Western Canadian Select versus WTI expanded due to rising freight costs.
Executives from Valero, Phillips 66, Marathon, and others expect wide WTI-WCS differentials and elevated margins through at least 2027, with Marathon forecasting record Canadian heavy crude processing in Q4.

Freight surge lifts refining economics

As reported by Reuters, security threats around the Strait of Hormuz are disrupting tanker traffic and pushing up war-risk insurance and voyage costs, raising the price of moving crude across key global routes. That is forcing sellers to deepen discounts on heavy crude grades and improving feedstock economics for U.S. Gulf Coast refiners, which can source barrels from nearby producers including Canada and Venezuela.

U.S. refining margins more than doubled in the third quarter, while rising freight costs widened discounts on Canadian heavy crude such as Western Canadian Select against West Texas Intermediate. More than 70% of Gulf Coast refining capacity is configured to process heavier crude, leaving those plants well positioned to benefit from cheaper input costs as Asian rivals face longer and riskier shipping routes.

Valero Energy executive Randy Hawkins said freight rates are now the main market story, with costs to ship crude from the U.S. Gulf Coast to Asia jumping to $30 to $35 a barrel from about $5 a year earlier. Valero chief operating officer Gary Simmons said higher freight rates also improve the company's position in export markets in Latin America, where it mainly competes with European barrels.

Wider differentials support outlook

Executives said ample heavy crude supply from Canada and Venezuela, together with elevated freight rates, is widening the spread between WTI and WCS and lowering refinery feedstock costs. For Phillips 66, executive Brian Mandell said every $1 widening in that differential is worth about $140 million in gains.

Arrow Shipping analyst Delia He said stronger fuel margins are more than offsetting higher shipping costs, adding that for every extra dollar of freight, the diesel margin has grown by at least eight. U.S. refiners are also partly shielded from higher spot tanker rates because several secured vessels before the war, including Phillips 66, which said it had lined up more than 40 time-charter vessels covering about 40% of its asset-based shipping needs.

Valero, PBF, Marathon and Canada's Suncor also arranged chartered fleets before the conflict began, helping insulate them from the price surge. Some executives expect the wider differentials to keep supporting results next year, with Marathon Petroleum forecasting record Canadian heavy crude processing in the fourth quarter and elevated margins through at least mid-2027, while HF Sinclair said the wider discounts are likely to persist at least through 2027.

In our earlier report on the conflict-driven surge in oil shipping costs, we explained how attacks and heightened risks on routes such as the Strait of Hormuz and the Red Sea have sent tanker rates and war-risk premiums sharply higher, making freight a much larger part of the delivered crude price. We also noted that the impact is uneven: import-dependent markets and buyers exposed to spot charter rates face the steepest cost increases, while some shippers and tanker owners benefit from elevated rates.

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