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Cheap crude benefits USGC refiners

A News and Data Feature

Steady USGC refining margins key to Midwest, European ULSD supply

By James Bambino and David Henry

August 11, 2014 -

* LLS cracking margins on USGC up nearly $5/b year on year
* Midwest LLS yields up $5/b over past week
* Coffeyville, Joliet outages tighten Midwest refinery capacity
* USGC-Group 3/Chicago ULSD arbitrages open and flowing
* European market remains attractive for USGC refiners

Cheap North American crude and strong spot prices for ULSD on both sides of the Atlantic have kept US Gulf Coast refineries firing away this summer.

Analysis continues below...

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Despite largely steady ULSD exports to Europe, strong Chicago and Group 3 prices could pull more barrels from the USGC north.

USGC refineries have been operating in excess of 93% over the past six weeks amid solid margins for North American crudes. Although crude runs may have peaked already -- hitting 8.65 million b/d the week ended July 4 (see chart) -- solid margins could see refiners try to push back seasonal maintenance further into the fall.

Gulf Coast cracking margins for Louisiana Light Sweet were $14.58/barrel Wednesday, well-above the 30-day moving average of $11.48/b, Platts data showed. LLS margins are stronger than they were this time last year, when they averaged just $9.66/b over a similar 30-day period.

Platts margins reflect the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by
applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.

A year ago, USGC crude runs had already peaked near 8.5 million b/d in mid-July. By mid-August, runs had dipped close to 8 million b/d before rallying again into September.

LLS margins have lately risen as spot crude prices for the grade have sunk, even though yields have also risen. Prompt LLS prices were assessed at $101.72/b Thursday, almost $4/b below the 30-day moving average. USGC yields, meanwhile, were pegged at $117.28/b Thursday, largely in line with the 30-day moving average.

That said, Midwest LLS yields are significantly higher, having jumped more than $3/b alone on Wednesday, suggesting the grade would likely fetch a higher value if processed in a Midwest refinery. Midwest LLS yields Thursday were pegged at $120.89/b.

Midwest refinery utilization tight

This comes at a time of tight Midwest refinery utilization and high agricultural demand. Midwest refineries have taken two significant hits lately in the wake of a fire shutting CVR Energy's entire 115,000 b/d Coffeyville, Kansas, refinery on July 29, as well as a hydrotreater issue at ExxonMobil's 238,000 b/d Joliet, Illinois, refinery.

Last week, rates fell to 93.8% of capacity, US Energy Information Administration data showed, which is still very strong. But that is down from more than 100% of capacity for the week ended July 11, when runs were at a record-high 3.82 million b/d.

These outages have severely curtailed Midwest refinery utilization rates, and a wider ULSD spread between Group 3 and Chicago relative to the USGC has seen more barrels pulled north.

Next page: US Gulf Coast refiners eye European market share

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