Quality matters: how the Hormuz crisis tests refinery flexibility

The disruption highlights a key reality often overlooked in the oil market: while volumes may be globally fungible, crude quality is not.

WHAT: The disruption to Hormuz flows has left many refiners struggling to replace lost medium and heavy sour crude with suitable alternatives.

WHY: Most refineries are optimised for specific crude slates, and switching to different grades alters yields, raises costs, or is not technically feasible.

WHAT NEXT: Crude markets are likely to remain segmented by quality, sustaining premiums for compatible grades and pressuring refining margins.

Oil is a very fungible commodity – meaning it can, in principle, be traded and substituted globally with relative ease. However, the US-Iran war and Tehran’s closure of the Strait of Hormuz have exposed the limits of that flexibility. The issue is that crude oil is not uniform: it varies widely by density and sulphur content, and refineries are typically optimised to process specific blends.

The disruption in oil flows from the Middle East has therefore left some countries—whose refineries are configured for the medium and heavy sour grades that dominate Gulf exports—with far fewer alternatives. On the other hand, rival producers of these heavier grades stand to gain, helping to explain while Russia’s flagship Urals sour blend has surged in value over the past month, even overtaking Brent. 

Optimising your crude slate

Taking together the export slates of major Gulf producers like Saudi Arabia, Iraq, Kuwait, the UAE, Qatar and Iran paints a clear picture. Roughly 50-60% of the region’s crude is medium sour, while a further 25-35% is heavy sour. In contrast only 10-15% is light, sweet crude, and further 5-10% condensate and natural gas liquids (NGLs).

In practice, while barrels can be rerouted, the ability to replace one type of oil with another type of oil is difficult without operational cost. This comes down to refinery configuration. Most refineries are designed around an optimal crude slate — a mix of grades that maximises output of high-value products such as diesel and jet fuel. This configuration is determined by hardware, including distillation units, cokers, hydrocrackers and desulphurisation capacity. Once built, these units constrain the range of crude a refinery can process efficiently.

Switching between crude grades is therefore not simply a matter of sourcing a different barrel. Moving from medium or heavy sour crude to lighter, sweeter alternatives — such as US shale or West African grades — typically alters the product yield. Light crude produces a higher share of naphtha and gasoline components, but less middle distillates, which are often the most valuable products in markets such as Asia. For refiners geared towards maximising diesel output, this can significantly erode margins.

Sulphur content is a significant factor. Middle Eastern crude is generally sour, meaning it contains higher levels of sulphur that must be removed during refining. Refineries configured to handle these grades are equipped with extensive desulphurisation units. While these facilities can process sweeter crudes, doing so underutilises key equipment and reduces efficiency. Conversely, simpler refineries without sufficient upgrading capacity cannot easily process heavier, more sulphurous crude at all.

Even where technical flexibility exists, adjustments take time. Refiners must recalibrate operating conditions across multiple units, optimise blending strategies and, in some cases, secure different intermediate feedstocks to balance output. Simple adjustments can take weeks, and more complex modernisation can take years. 

Cost is another limiting factor. Medium and heavy sour crudes typically trade at a discount to lighter grades because they require more processing. Replacing them with light sweet crude raises feedstock costs, weakening refining margins. 

Blending can offer a potential workaround. Refiners may combine lighter and heavier crudes to approximate their preferred slate, but this requires access to both types of feedstock and sufficient storage and handling infrastructure. It also rarely replicates the exact properties of the original crude, leading to suboptimal yields.

Taken together, these constraints mean that while the global oil market is often described as fungible, substitution is far from seamless at the refinery level. The loss of a specific category of crude — in this case, the medium and heavy sour grades that dominate flows through Hormuz — creates a mismatch that cannot be quickly or easily resolved, even in a well-supplied market.

Who feels the squeeze the most?

At the sharpest end of the disruption are South Asia’s import-dependent refiners, led by India and Pakistan. India’s refining system, one of the largest in the world at more than 5mn barrels per day (bpd) of capacity, is also among the most complex. Facilities such as Reliance Industries’ Jamnagar complex and Nayara Energy’s Vadinar refinery are equipped with cokers and hydrocrackers designed to process discounted heavy and medium sour crude from the Middle East.

That complexity does not mean flexibility. Indian refiners can technically run lighter crudes from the US or West Africa, but doing so typically reduces yields of middle distillates such as diesel – the core of India’s product slate – and increases output of lighter products like naphtha. More importantly, it erodes margins by replacing cheaper sour crude with more expensive light sweet alternatives. So India can switch, but only at a significant economic cost.

Pakistan has a more serious issue. Its refining system is much smaller – around 450,000–500,000 bpd – and far less sophisticated, dominated by older hydroskimming units with limited upgrading capacity. These refineries are configured for a narrow range of Middle Eastern grades and lack the hardware to handle significant changes in crude quality. Substituting Gulf barrels with lighter crudes can lead to operational inefficiencies and lower throughput. The result is not just margin pressure, but a tangible risk of supply disruption and increased reliance on imported refined products.

In the second tier in terms of vulnerability are countries in Southeast Asia such as Indonesia, Thailand and Vietnam, which rely heavily on imported crude, much of it sourced from the Middle East. Refining systems across the region are mixed in complexity but are generally configured around medium sour benchmarks such as Arab Light and similar grades.

While these refineries have some capacity to adjust crude slates, large-scale substitution is challenging. Switching to Atlantic Basin supplies – primarily light sweet crude from the US or West Africa – requires changes in blending and often results in poorer yields. Logistics also become more complex and costly, with longer shipping routes and tighter availability of suitable grades. The region is therefore exposed to both higher feedstock costs and reduced refining efficiency, though not to the same degree of outright constraint seen in Pakistan.

The situation in North Asia is more nuanced. Japan and South Korea are among the most dependent on Middle Eastern crude in volumetric terms, with the Gulf typically accounting for 80-90% of imports. Yet their refining systems are also among the most sophisticated globally, with high Nelson complexity indices and extensive upgrading and desulphurisation capacity.

This allows refiners in both countries to process a wider range of crude types, including lighter and sweeter grades from outside the Middle East. In previous disruptions – from sanctions on Iran to the 2019 attacks on Saudi Arabia’s Abqaiq facility – Japanese and South Korean refiners demonstrated an ability to adjust their crude slates relatively quickly. Strategic petroleum reserves also provide an additional buffer, enabling a smoother transition during supply shocks.

The trade-off is cost, though. Replacing medium and heavy sour Gulf crude with lighter alternatives raises feedstock prices and can compress refining margins, even if operations remain technically stable. In other words, North Asia’s exposure is primarily economic rather than operational.

Europe, meanwhile, sits at the more flexible end of the spectrum. Although some refiners – particularly in the Mediterranean – are configured to process heavier and sourer crudes, the region as a whole sources a more diversified crude slate. Supplies from the North Sea, West Africa, the US and Latin America provide a broader range of options than is available to Asian importers.

European refiners have also spent years adapting to shifts in crude availability, most notably following the loss of Russian Urals crude after the invasion of Ukraine. That experience has accelerated investments in flexibility, including greater use of blending and optimisation of refinery units to handle different feedstocks. While replacing Middle Eastern barrels would still carry a cost, particularly for more complex refineries geared towards heavier grades, Europe is generally better positioned to adjust than Asia’s more Gulf-dependent markets.

Who benefits?

Naturally this all puts producers of medium to heavy soul crude outside of the Middle East in a privileged position. 

Foremost among them is Russia, whose flagship Urals blend has emerged as the closest large-scale substitute for disrupted Gulf barrels. Urals is a medium sour crude with broadly similar characteristics to key Middle Eastern grades such as Arab Light and Basrah Medium, making it relatively straightforward for many refineries to process without major adjustments.

That compatibility has led to the price of Russia’s Urals blend soaring. As of April 13, Urals was trading at roughly $115 per barrel – around a $15 premium to Brent. Traditionally Urals has traded at a discount to Brent and other global benchmarks, particularly in the wake of Western sanctions on the country’s crude following Moscow’s invasion of Ukraine. Russian President Vladimir Putin has for years seen closing the gap between Urals and Brent as a strategic priority, and the current crisis means he finally has his wish.

India and China, already major buyers of Russian crude, have been particularly well positioned to absorb additional volumes, given that they already have the logistics in place and suitable refinery configurations.

Beyond Russia, alternative sources of heavier sour crude are more constrained. Canada is the largest producer of heavy crude outside the Middle East, with oil sands output yielding dense, high-sulphur blends such as Western Canadian Select. These barrels are well suited to complex refineries equipped with coking capacity, particularly in the US Gulf Coast. However, Canada’s ability to respond to global disruptions is limited by infrastructure. Pipeline constraints and geographic distance mean that most of its crude remains effectively locked into North American markets, with only limited capacity to reach Europe or Asia.

Mexico offers another source of heavy sour crude through its Maya blend, but volumes are relatively modest and increasingly tied to domestic refining needs. Venezuela, meanwhile, holds vast reserves of extra-heavy crude, but years of underinvestment, operational challenges and sanctions have severely curtailed its export capacity. While some incremental barrels have returned to the market, Venezuela is not in a position to provide a large-scale or rapid replacement for lost Gulf supply.

Other producers, including Brazil, offer medium to heavy grades, but these are generally less sour and therefore not direct substitutes for the dominant Gulf export slate. As a result, while they can contribute to easing overall supply tightness, they do little to resolve the specific shortage of medium and heavy sour crude.

The net effect is a market in which the loss of Middle Eastern supply cannot be fully offset by alternative producers. Instead, it has reshaped crude differentials, rewarding those with compatible grades and leaving others to compete for a limited pool of suitable barrels. The disruption highlights a key reality often overlooked in the oil market: while volumes may be globally fungible, crude quality is not.