Crack spreads have collapsed in early 2008, especially for gasoline, shrinking US and European refining margins. The February 3-2-1 crack spread on NYMEX fell to $5.41/barrel Thursday, from $8.27/b on January 2. According to Platts data, the US Gulf Coast sour refining margin shrank from $8.435/b to $6.29/b over the same period, the lowest in nearly two years, while on the West Coast the ANS refining margin fell to from $9.375/b to minus $3.415/b.

So with refining margins weak and gasoline inventories rising fast, what's a refiner to do? The normal answer would be to cut runs.

There's only one problem -- retail gasoline prices averaged $3.109/gal as of January 7, according to the Energy Information Administration, up 71.9 cents/gal over a year ago.

Will major refiners, who also have retail marketing operations, really cut crude runs with pump prices that high? It's a sure-fire way for a CEO to end up in front of a Senate committee.

US gasoline inventories surged 5.3 million barrels during the week ending January 4, according to the EIA, and now stand nearly 800,000 barrels above the five-year average. The impact of increased supply has been seen in the spot markets, where gasoline differentials have tumbled to steep discounts to NYMEX.

That could portend a drop in retail prices, offering refiners room to slice runs. More likely, the pace of refinery maintenance will pick up as much as the depleted skilled labor force will allow, while some refinery expansion projects may quietly be delayed.

The decline in margins should also give pause to investors looking to snap up a refinery or two, especially when the seller is someone like Valero, who has had impeccable timing in catching the refining wave just right, and may be looking to take some profits before the business goes south again.

Posted by Dave Marino on January 11, 2008