February is shaping up nicely for US Midwest refiners, who are enjoying robust margins courtesy of another Brent/WTI spread blowout.
The Midwest WTI cracking margin averaged $21.82/barrel the first six business days of the month, up from a January average of $15.17/b, according to Platts data and Turner, Mason & Co. yield formulas.
That's around $10/b shy from the $31.40/b third quarter 2011 average, when the WTI cracking margin briefly peaked at $42/b, but still strong considering that US refined product demand has been far less-than-stellar.
Current Midwest margins are being primarily driven by relatively weak crude prices, rather than product strength. The Midwest -- Group 3 and Chicago -- refined product markets are currently the lowest priced in the country. Chicago ULSD, for instance, was assessed at 17.85 cents/gal below the Gulf Coast February 8, and 23 cents/gal below the Atlantic Coast.
Chicago conventional gasoline was assessed 30 cents/gal below
the Atlantic Coast.
These low Midwest product prices would be more of a concern to
area refiners if they were processing the same crudes being run
through Atlantic Coast and Gulf Coast refiners.
For instance, netback for West African Bonny Light crude in
the Midwest was $121.05/b February 8, a slight premium to the
WTI netback at $119.44/b.
But a Midwest refiner would pay a steep premium for Bonny Light
crude, which is priced off the North Sea Brent benchmark,
resulting in a cracking margin of just $3.07/b February 8,
compared to $20.46/b for WTI. Processing Light Louisiana Sweet
crude from the Gulf Coast would be an improvement, but only
slightly, netting a Midwest cracking margin of $5.38/b.
The growing supply of local and Canadian crudes has largely
shielded Midwest refiners from the price impacts of dwindling
North Sea output, and various other supply concerns.
Brent and Urals crude prices may jump if Iranian exports dry up,
but with Canadian exports at a record high Midwest refiners have
little to worry about.
Even during the fourth quarter of 2011, when margins sank around the world, spawning a string of refinery closures, Midwest margins held up.
The Midwest cracking margin for Canadian Syncrude, for instance, averaged $14/b in the quarter, compared to an Atlantic Coast Bonny Light margin of $5.31/b, or, much worse, a Cabinda coking margin in the Caribbean of minus $1.69/b.
You have to go back to the first quarter of 2010 to find
negative margins for WTI in the Midwest. That was back before
WTI was "broken" and trading at a premium to Brent.
The highest cracking margins in the Midwest are currently for
Canadian crudes. The Syncrude cracking margin was at $44/b
February 8.
But there's a hitch. That margin is inflated by a severely depressed spot crude price, the result of a backlog of barrels in Canada.
Midwest refiners have been cutting runs, and importing less crude, the past couple of weeks, likely in response to high product inventories in the region. Refiners processed 3.404 million b/d of crude the week ending February 3, 102,000 b/d from the week ending January 20, according to US Energy Information Administration data. That left Midwest refiners operating at 91.8% of capacity, down from 94.5% January 20.
As a result, the product surplus has deteriorated somewhat. Midwest ULSD stocks at 31.937 million barrels the week ending February 3 were 7.36% above the five-year average, down from a 17.21% surplus in mid-January.
But, assuming there is physical storage available, refiners likely won't worry too much about product inventories growing, as long as the crude supply holds out.
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