Margins surge for US inland refiners as Cushing crude bottleneck leads to WTI discount - study
US refinery margins surged in the first quarter, led mostly by inland refineries amid historically low prices for WTI-priced inland crude oils relative to waterborne alternatives, according to a study released on Tuesday from consulting firm Baker & O’Brien.
When compared against the previous quarter, refinery cash margins have risen, on average, over $2/bbl, the firm said. The margin gains were driven primarily by very large profits in the mid-continent region, benefitting from the well-publicized crude oil bottleneck in Cushing, Oklahoma.
Thus far, April and early May indicate continued widening of the light-heavy spread and improved crack spreads, the report said.
While the light-heavy crude oil price differential (LLS-Maya) indicates favorable conditions for refineries with heavier crude oil slates, the big winners have been mid-continent refineries with access to land-locked crude oils such as WTI and Canadian Heavy, leaving them without an easy outlet to the US Gulf or other US markets.
Historically, Gulf coast refineries in Texas and Louisiana have outperformed inland refineries in states such as Illinois, Indiana, Ohio and Oklahoma.
The Gulf refineries are generally more complex, allowing them to process much cheaper crude oils, and have access to a greater variety of crude oils due to their proximity to the water.
However, increased crude oil supply to the mid-continent has greatly depressed prices of domestic light-sweet crude oils versus waterborne crude oils.
The situation was exacerbated in early 2011 due to refineries conducting their scheduled off-season turnarounds, thus reducing demand for light sweet crude oils, the consulting firm said.
Refineries processing WTI and crude oils that are WTI-based are now benefitting from historically low crude oil prices relative to LLS and waterborne light-sweet grades, which are historically Brent-based.
After selling at a discount to LLS of a little over $4/bbl during the fourth quarter of 2010, the WTI discount exploded to more than $20/bbl at times during the first quarter of 2011, averaging $13/bbl for the full quarter.
As a result of the high WTI discounts, the industry is evaluating and implementing a number of projects to take advantage of the large WTI discounts. Although per-barrel rail and barge transport costs are more expensive than pipelines, both rail and barge transportation are being utilized to capture a portion of the WTI discount.
Once sufficient additional pipeline capacity is placed into service, the current high discounts will likely decrease to historic norms. However, a return to historical norms may not happen until 2013 or later.
In the meantime, mid-continent and Rocky Mountain refiners with access to these inland crude oils will continue realizing hefty margins relative to other areas of the country, the consultancy predicts.
For specific margin figures, you can access the graphs by clicking here.
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