September 28, 2026

Latam's oil trade is being rerouted by the Middle East crisis

Key takeaways

The global crude market is running a deficit of about 1-2 million b/d, as Middle East losses in medium-to-heavy grades push demand toward Latin America's heavier barrels, even though Brazil's output growth has flattened while Guyana's is picking up speed thanks to the country's latest FPSOs.
Vaca Muerta's light crude output in Argentina is ramping up faster, aided by YPF's new pipeline expected online in late 2026 or early 2027, with a growing portion of barrels shifting from the US to Asia since the US-Iran war began.
A temporary 12% cut in Brazil's export tax to the EU, worth roughly $4-5 per barrel per shipment, has redirected crude flows away from China and toward Europe, while higher ethanol blending mandates across the region are helping narrow Latam's gasoline shortfall.
Latam's diesel market, an import region of over 1 million b/d, now sources more than 85% from the US Gulf Coast; a full US export ban is the single biggest threat to the region, with an estimated 16% hit to West-of-Suez clean tanker ton miles.
Middle East disruption has roughly doubled the number of vessels needed to move Saudi crude via the east coast shuttle route, pushing dirty tanker and VLCC rates to record highs and dragging Atlantic Basin rates, including Brazil's, up with them.
Panama Canal drought risk is squeezing the 300 to 400 kb/d diesel corridor that supplies West Coast Latam, with no cheap alternative given how expensive Asian cargoes have become.

Medium and heavy crude is the market's real shortage

Middle Eastern supply outages have pushed the global crude balance into a deficit of roughly 1 to 2 million b/d, with these outages driving down the availability of heavier grades in particular. Alternative sources of medium-density supply are increasingly scarce. Europe, which lacks domestic medium-density crude and is heavily import-dependent, is facing mounting challenges on this front: Johan Sverdrup, its largest medium-density field, has peaked and is expected to decline around 10% year on year in 2026, while Western sanctions continue to keep Russian medium crude largely out of the market. With these traditional sources constrained, the market has little slack to absorb outages, as seen in the recent disruption at Yanbu and the East-West pipeline. When such outages hit, refiners are left with two choices: pay up for alternative medium-to-heavy grades, or run lighter crude instead and sacrifice middle distillate yields. It's this scarcity dynamic, not just the outage itself, that explains why Guyana's medium-yielding barrels have been bid up so sharply recently, following the disruptions at the East-West pipeline, since they're one of the few substitutes available. High middle distillate cracks are set to drive continued demand of heavier grades, a potential US diesel export ban, though dismissed as speculation by the US administration, would keep middle distillate cracks elevated outside the US regardless, further incentivizing refiners globally to ramp up consumption of medium crudes. Together, this is the backdrop that makes Latin America's heavier grades, Venezuelan crude in particular, so relevant to refiners well beyond the region.

Argentina and Guyana are pulling in opposite directions from Brazil

Vaca Muerta's growth has accelerated further in recent months, and the main constraint, pipeline capacity, is set to ease once YPF's new pipeline comes online in late 2026 or early 2027, pushing supply above 1 million b/d. New licensing deals with US independents, new tax incentives and cheap associated gas are all pulling in fresh capital. Since the start of the year, a growing share of that light crude has moved to Asia rather than the US. Brazil crude supply, by contrast, looks to be plateauing near current output levels, while Guyana's growth is expected to accelerate again as its latest FPSO comes online. Brazil's temporary 12% export tax cut to the EU, worth $4 to $5 a barrel per shipment, has diverted flows from China to Europe. Venezuela remains the wildcard: lifting output from 1 million to 2 million b/d would need an estimated $100 billion of capital plus one to two years of grid repairs, and port delays of up to 30 days are already showing the strain of new supply hitting ageing infrastructure.

Ethanol and refinery runs are quietly closing Latam's gasoline gap

Rising regional crude supply, lighter year-on-year maintenance schedules and healthy margins are expected to sustain this year's growth in Latam refinery runs into next year, adding slack to a market still in gasoline deficit. Mexico's Olmeca refinery, one of the Atlantic Basin's biggest new builds alongside Nigeria's Dangote, has had a rougher ramp-up and is expected to stabilise around 220 kb/d by year-end against a 340 kb/d design capacity, with output focused on the domestic market. Ethanol is doing more of the heavy lifting: Brazil's blending mandate rose from 27% a year ago to 32% since early August, with the legal ceiling now raised to 35%, Guatemala introduced a new E10 mandate in July, Panama has moved from E5 to E10, and Chile, still fully reliant on MTBE, started drafting its first blending proposal this month. Brazil's ethanol-to-gasoline price ratio has fallen from well above the 70% competitiveness threshold to closer to 60%, making pure ethanol the more attractive option for drivers, helped by zero federal tax on the fuel. Gasoline imports have shifted from Russia, now banned from exporting the product, toward Northwest Europe and the US. Retreating Chinese exports of MTBE and other blending components, which reach Latam via the Trans-Pacific route, are the swing risk to watch for the fourth quarter.

Diesel is Latam's most exposed product

Latam's diesel import market, over 1 million b/d, now draws more than 85% of its supply from the US Gulf Coast after record US export volumes in July. Russia was a secondary supplier to the region overall but the primary supplier to Brazil specifically, and that volume has largely disappeared. US inventories have been drawn down hard to meet this export pull, particularly in PADD 1, where the pipeline spread from PADD 3 has been negative for most of the year. A full US export ban looks unlikely, but export controls are a live discussion, and either way the region has no supplier that can replace US volumes at scale. Brazil has leaned harder on the US this year while also delaying maintenance amid strong refining margins, and will have a higher import requirement next year given its 2027 maintenance catch up. West Coast Latam depends on 300 to 400 kb/d of diesel moving through the Panama Canal, and El Nino-driven drought risk is already slowing transits and raising costs, with no cheap alternative: Asian cargoes are expensive given high Middle Eastern crude costs, and US West Coast supply has itself been shrinking.

Freight is where all of this converges

The attack on Saudi Arabia's East-West pipeline forced more crude exports through the less efficient east coast route, where cargoes are shuttled to the Gulf of Oman before being transferred onward, roughly doubling the number of vessels required for the same volume. That has pushed VLCC and dirty tanker rates to record highs, with the effect spilling into the Atlantic Basin, Brazil included. Kpler's analysts expect this tightness to persist, with no significant US-Iran breakthrough anticipated in the coming months. Latin America, specifically Brazil and Argentina, is the largest source of tanker demand growth outside the Middle East, and because so much of it is long-haul to China, ton miles are expected to rise even faster than cargo volumes. On the clean side, Latam-bound tanker flows have pivoted hard from Russia to the US Gulf, whose share of exports into the region has risen from around 42% to nearly 60%. Two scenarios could move the market further: a full US diesel export ban could cut West-of-Suez clean tanker ton miles by an estimated 16%, undercutting the MR segment with no obvious replacement source at scale, while a serious disruption to Panama Canal transits could more than double the ton-mile impact of US Gulf exports to West Coast Latam, which would be bullish for freight even as it raises costs for importers.

Key watchpoints

Strait of Hormuz reopening pace: Kpler's base case is a steady but turbulent reopening, and how fast it proceeds will decide how much pressure comes off Atlantic Basin freight and medium crude balances.
US diesel export policy: a full ban looks unlikely, but even export controls would tighten a market Latam depends on for over 85% of its diesel imports.
Panama Canal water levels: further El Nino-driven drought could force more of West Coast Latam's diesel corridor onto costlier long-haul routes.
Chinese blending exports and Vaca Muerta's pipeline ramp: both will shape how much slack Latam's gasoline and light crude balances get over the coming year.
Latin America is not a bystander to the Middle East crisis. It is becoming one of the routes the rest of the world's oil trade now has to route around.

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