Just a couple days ago the Barrel raised the question of whether it was time for refiners to start cutting runs, in light of shrinking refining margins and rising product inventories.
Then just Monday, Tesoro announced that their first-quarter crude throughput would be lower, partly due to bringing a new coker at one of their refineries, but also because of run cuts in January on the back of weak margins.
After the Barrel got done patting itself on the back for the timely prediction, it got back down to business. It made sense that the West Coast was the site of the initial run cuts, as CARBOB prices had fallen to record lows below NYMEX futures, dragging down refining margins. But let's take a look at other regions, to see where more cuts may be in the cards:
The Midwest is the best candidate, as sweet margins averaged just $0.94/barrel last week, according to data from Platts and Turner, Mason & Company. Monday the scenario turned even bleaker, with conventional gasoline differentials falling 11 cents/gal in one day and taking the sweet margin down to minus $4.11/b. The sour margin is also in negative territory now, at minus $1.24/b. A year ago, sweet margins were at $2.19/b and sour at $6.96/b. The weak margins should bode ill for Canadian sour crude producers, who export primarily to the midwest and should see their differentials under heavy pressure.
The Gulf Coast appears to have hit a floor around $2.50/b for sweet and $6.25/b for sour; neither number is particularly attractive compared with levels 5 to 10 times higher seen in May 2007, but are only $1 to $1.50/b below year-ago levels.
The US Atlantic Coast is the superstar, with a $4.08/b margin for sweet and a $7.335/b margin for sour, as of Monday, compared with $4.05/b and $10/b a year ago. However, as the most attractive market, it will attract barrels from refiners on the Gulf Coast who will be packing Colonial Pipeline with product. Also, refiners in Northwest Europe, where the cracking margin averaged just $0.825/b last week, are loading cargos to head across the Atlantic.
Looking at particular refiners, Sunoco, with a primarily sweet crude slate, does not appear to be hit particularly hard in the northeast, where the bulk of its refineries are located, or in the Midwest, where the difference between sweet and sour margins is only $2-3/b. Sour crude differentials have held mostly steady relative to light, sweet grades, despite the latest rally for NYMEX and ICE crude futures up to the mid-$90s. That may not be a good sign for Valero, who relies more on wide sweet/sour spreads to boost refining profits.
How come margins are so low in comparison to last year when inventories of gasoline and distillates are under last year's levels? Will the margins turn up as maintenance kicks in and driving season ramps up?
The price of crude futures is about $40/barrel higher than a year ago. With crude stocks down near the low end of their five-year average, and distillate and gasoline stocks around average, it is more the relative tightness in crude than an abundance of product that has hurt margins.
Margins are likely to pick up over the next few months, as run cuts or maintenance (or some combination of the two) trim production and demand picks up as distributors restock ahead of peak gasoline and diesel demand.