Analysis: U.S. Refiner Margins At Risk Despite Oil Price Dip

SECAUCUS, NJ (DTN) –Crude prices have dropped 30% on Wednesday (3/10) from the nearly $120 bbl recorded the previous day, but U.S. refining margins remain vulnerable in an oil market sharply elevated by the Iran war.

Front-month West Texas Intermediate crude on the New York Mercantile Exchange hovered at around $85 bbl on Tuesday (3/9) from four-year highs hit the prior day. That was still nearly $20 bbl above WTI’s closing price on February 27, just before the start of U.S.-Israel airstrikes on Iran.

The concern to U.S. refiners is, of course, whether they can continue maintaining positive margins at current crude prices.

Generally, if crude prices rise, refiners adjust by passing costs down the line; product prices for gasoline and diesel tend to increase to compensate and maintain margins. 

For the week ended March 6, Gulf Coast’s benchmark Light Louisiana Sweet 3-2-1 crack spread stood at $20.76 bbl, down 28% decline from the prior week.

Regional spot markets experienced a recalibration recently, with CBOB and ULSD differentials initially dipping on cycle changes before roaring back as waterborne export demand intensified.

Chicago CBOB basis surged by 8 cents as regional inventories hit multi-year lows. California and Pacific Northwest markets saw the biggest moves, with spot gasoline premiums surging to push retail averages past $5.20 in some zones.

Another immediate concern for U.S. refiners is balancing feedstock availability against their highly specialized, capital-intensive infrastructure.

Saudi Arabia and Iraq supplied U.S. refiners with roughly 520,000 bpd and 154,000 bpd, respectively, in 2025, according to the U.S. Energy Information Administration.

While there’s talk that the Iran war might end sooner than the 4-5-week timeline given by the U.S., supply from the Middle East is still being throttled. Only two crude or refined product tankers reportedly exited the Persian Gulf on Sunday (3/8) – versus the typical daily average of 35 – as Iran continued to blockade the Strait of Hormuz where some 21 million bpd of petroleum liquids pass.

The Hormuz blockade effectively severs these primary import channels, forcing these refiners to pivot to Western Hemisphere and domestic sources to mitigate the shortfall.

Roughly 70% of U.S. refining capacity is engineered to run most efficiently on heavier, sour crudes, which are traditionally imported. If the blockade forces a sustained reduction in these heavy imports, U.S. refiners cannot simply substitute domestic light, sweet shale oil without incurring significant efficiency losses.

Theoretically, cushion could emerge if Venezuela’s production intensified, as its output is now under White House custodianship. Venezuela’s heavy, sour crude is ideal for U.S. Gulf Coast refineries, but scaling its approximately 900,000 bpd output requires tens of billions in investment.

Furthermore, the Trump administration’s recent easing of Russian crude sanctions aims to stabilize global prices, providing the broader market with needed relief rather than directly supplying U.S. refiners.

Without adequate sour crude, feeding light, sweet crude into systems built for heavy feedstock could lead to severe bottlenecks in light-ends distillation, leaving expensive assets like cokers and hydrocrackers critically underutilized. The mismatch effectively reduces the operational throughput of a refinery, meaning a plant designed for 300,000 bpd may be constrained to significantly lower levels when forced to process a suboptimal crude slate.

U.S. crude oil refinery inputs averaged 15.8 million bpd for the week ended February 27, with facilities operating at 89.2% of their operable capacity.