Mid-Continent Refiners Making the Most of WTI Disconnect
How long before expanded North-to-South logistics "shut the party down'?
May 19, 2011
Baker & O'Brien, Inc.’s first quarter 2011 release to PRISM™ subscribers reflects higher margins overall and improvement in every district except for PADD 1. When compared against the previous quarter, refinery cash margins have risen, on average, over $2 per barrel, driven primarily by very large gains in PADDs 2 and 4 (each up over $8/Bbl.), benefitting from the well-publicized crude oil bottleneck in the Cushing region.
Thus far, April and early May 2011 indicate continued widening of the light-heavy spread and improved crack spreads. While the light-heavy crude oil price differential (LLS-Maya) indicates favorable conditions for refineries with heavier crude oil slates, the big “winners” of late have been those Mid-Continent refineries that have access to crude oils (e.g., WTI, Canadian Heavy) which are “land-locked” without an easy outlet to the U.S. Gulf Coast or other U.S. markets.
Historically, Gulf Coast refineries in PADD 3 (e.g., Texas and Louisiana) have outperformed inland refineries (e.g., Illinois, Indiana, Ohio, and Oklahoma). The Gulf Coast 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 chart below shows the benefits of running a barrel of WTI-priced crude oil compared to LLS during the last three years.
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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 (prices that 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 and, 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.
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Contact: Benjamin F. Schrader