Summary: American refiners have been exceptionally strong over the last two years. They’ve benefitted from strengthening oil prices, and more importantly, a widening WTI-Brent spread. But in the last month, that spread and the low-ball prices they were paying, have quickly dissipated. Add overflowing gasoline stockpiles and external political pressure to the mix, and the industry may have some harder times ahead.
As MRP highlighted in mid-June, crude oil production out of the Permian basin is currently outpacing pipeline capacity. Because of this, domestic markets in the US became stocked with cheap crude, which played a large role in increasing the spread between the US benchmark, West Texas Intermediate, and the international benchmark, Brent. The larger the spread, the lower input costs for American refiners, relative to their international counterparts. At one point, the spread became as wide as $11 for the first time since 2015. Some industry analysts had expected U.S. production to outpace pipeline capacity by an even wider margin into 2019, creating an even larger Brent-WTI spread.
However, the price of WTI is still up almost 14% over the last 2 weeks and, as a result, the Brent-WTI spread has collapsed to less than $3.50. Because of this, profitability is sliding at a time when AAA is projecting Independence Day weekend will see the highest gas prices in four years. The Nymex gasoline crack spread, a rough measure for how much refiners make from producing the motor fuel, sank more than 30% in June, the biggest drop for the month in a decade. At the current level, with the price of the input appreciably higher, the gasoline crack spread has come down reflecting a worsening profit horizon for refining companies.
U.S. refiners have just returned from scheduled maintenance and, as of the week ended June 22, are processing more than 18 million barrels per day (b/d) of crude and other oils for the first time ever. Refineries’ fast-paced processing drive should prove especially counterproductive to profitability considering crude inventory slides have been the key catalyst pushing prices up. Further, the largest portion of that processed crude will turn out as gasoline, mounting on the fuel’s already overflowing inventory. Even though EIA data has shown U.S. demand steadily increasing to 9.7 million b/d, one of the highest levels of the year, gasoline stockpiles jumped 2.9% in June, the biggest gain for the month since 2009. There’s enough supply to cover 25.4 days of demand, almost a full day above the five-year average.
Pumped up biofuel quotas that could take effect next year are also raising red flags at refineries around the country. Under an Environmental Protection Agency proposal released Tuesday, refiners would have to blend 19.88 billion gallons of biofuels next year, a 3.1% increase over current quotas. Quotas like this impose additional excessive costs on refineries and can cost the industry hundreds of millions of dollars. Ethanol, for instance, has fewer and more expensive transport options because it corrodes pipelines, and is 39% less efficient than gasoline, so much more is needed to produce an equivalent amount of energy.
Even more threatening is the oncoming trade war, which threatens to wipe out hundreds of millions in GDP growth. Thus far, higher prices of crude and gasoline have proven demand to be relatively inelastic, and some economists believe high prices will, in the end, benefit GDP. But external factors associated with declining GDP such as job loss, and shrinking wage growth, could hurt Americans’ willingness to pay for gasoline and other crude-derived products in the coming months.
Investors can gain exposure to refineries via the Refinery ETF (CRAK). Over the last 2 years, CRAK has outperformed the S&P by 38%. But over the last month, it has fallen sharply, declining 7%.
We’ve also summarized the following articles related to this topic…
Refineries: Oil Refiners in U.S. at Full Throttle With Margins Under Threat
U.S. refiners have returned from maintenance with a vengeance, processing more than 18 million barrels a day of crude and other oils for the first time in the week ended June 22. What does that mean for the markets? Gasoline stockpiles have increased 2.9 percent in June, the biggest gain for the month since 2009. There’s enough supply to cover 25.4 days of demand, almost a full day above the five-year average.
The record runs are squeezing the once-mighty profit margins for refiners. The Nymex gasoline crack spread, a rough measure for how much refiners make from producing the motor fuel, sank more than 30 percent in June, the biggest drop for the month in a decade, helped by a tightening WTI-Brent spread. With gasoline the weakest relative to diesel seasonally in five years, refiners are pushing out motor fuel into a swamped market. A glut of gasoline will weigh on margins, given it’s almost twice the yield of distillate.
Some of the apparent demand weakness could be due to exports of the fuel, which have run well above historical levels this spring. Higher pump prices may also put a damper on demand. Retail gasoline flirted with $3 a gallon before falling back, and is still about 60 cents a gallon more expensive than a year ago. B
Refineries: 1 Metric Explains Why Oil Refinery Stocks Are Soaring Right Now
Crude oil production in the Permian Basin, arguably the most important energy-producing region on the planet, has outpaced pipeline capacity expansion. The bottleneck means the region — and now the nation’s central oil depot in Cushing, Oklahoma — is swimming in a glut of oil. Meanwhile, companies racing to export crude oil are pushing the country’s pipeline utilization rates closer to full capacity.
The combination of pipeline bottlenecks is now dragging down the price of West Texas Intermediate (WTI) crude oil to levels well below that of Brent crude.
The pricing mismatch is a boon for American refiners. Right now domestic refiners have significantly lower input costs than their international peers. That means they can produce refined petroleum products such as diesel at much lower cost, and then export it into markets where prices are significantly higher (because higher-priced and heavier Brent crude is the starting input). The price difference is pocketed as a handsome profit.
Wall Street is starting to catch on, with extra credit being awarded for those with sizable operations in the Permian Basin or along the Gulf Coast. Marathon Petroleum stock has gained 12% this year. Phillips 66 stock has gained 13% year to date thanks largely to the Brent-WTI spread. Meanwhile, Delek US Holdings stock is up a whopping 51% this year. TMF
Refineries: Trump Proposes Hitting Oil Refiners With Boosted Biofuel Quotas
Ethanol producers and farm-state leaders blasted a Trump administration proposal that would force refiners to blend more biofuel into petroleum next year, arguing the modest planned increase is undercut by EPA waivers exempting refineries from the mandate.
The proposed 2019 target for advanced biofuels would be 4.88 billion gallons, including at least 381 million gallons of cellulosic renewable fuel, such as ethanol made from switchgrass. The EPA also outlined a potential 2.43 billion gallon quota for biodiesel in 2020, a 15.7 percent increase from the 2.1 billion gallons required in 2019.
Biofuel advocates cheered the potential jump in quotas for biodiesel, which is typically made from soybeans. Meanwhile, prices for the credits tracking 2018 ethanol targets slumped 3.5 percent to 28 cents apiece, on track for the steepest one-day decline in a week. AgWeb
Refineries: AAA Reports Independence Day Holiday Gas Prices to be Highest in Four Years, but Cheaper than this past Memorial Day Weekend
At $2.86, gas prices are at their highest point for an Independence Day holiday in four years. However, for the nearly 40 million motorists expected to travel this week, they will find prices at the pump 11-cents cheaper than this past Memorial Day holiday.
The national gas price average has held fairly steady for the past 10 days, suggesting that U.S. demand is keeping pace with supply and stabilizing summer gas prices. However, elevated crude oil prices and other geopolitical concerns could tilt gas prices more expensive in the early fall despite an expected increase in global crude production from OPEC and its partners.
If U.S. demand remains strong, domestic and global supply decline and crude inventories continues to sell over $70/bbl, motorists may see the national gas prices average to potentially jump back up to nearly $3/gallon in coming months. GRC