REFINERY MARGIN TRACKER: USGC Coking Margins Increase Strong Demand, Wider Crude Spreads

Strong points

Strong U.S. turnaround season ahead to reduce product supply

Wider Sweet & Sour Crude Spreads Help USGC Coking Margins

High USGC margins also favored by the European energy transition

U.S. Gulf Coast coker spreads have topped regional crack spreads as distillate demand surges above 2019 levels, European refiners seek lighter crudes and seasonal plant turnarounds begin to taper production, sources said.

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Major U.S. refiners agreed in their fourth-quarter results that demand for gasoline and diesel has rebounded since the coronavirus pandemic slowed. And lagging demand for jets is on the road to recovery as more countries open their borders, supporting higher coking margins.

Sophisticated refinery coking margins dotting the USGC for Mexican Maya averaged $8.78/bbl for the week ending Feb. 11, from $7.81/bbl the previous week, margin data shows. from S&P Global Platts Analytics.

Demand for gasoline and diesel is already above 2019 levels as each successive wave of coronavirus has less of an impact on demand.

And “from a demand perspective, gasoline, diesel and jet inventories are well below 2019 levels in terms of days of forward coverage,” said PBF Energy CEO Tom Nimbley on a Feb. 10 fourth-quarter earnings call.

“We view this as a very constructive setup for 2022. Product inventories are low, demand continues to strengthen and reduced refining capacity due to global capacity rationalization should all support favorable refining margins,” Nimbley said on the call.

Most U.S. refiners estimate that around 4.5 million bpd of global refining capacity has been eliminated by the coronavirus pandemic.

“We expect demand in 2022 to continue its strong recovery and surpass 2021,” he added.

Crack margins also remain healthy, as the lack of storms pushed U.S. gasoline demand up 6.5% week-over-week last week, according to GasBuddy’s Patrick De Haan.

USGC WTI-MEH crack spreads averaged $18.96/bbl for the week ended Feb. 11, according to data from Platts Analytics, compared to $18.11/bbl the previous week.

Removing RINs, the renewable energy credits used by refiners to meet the U.S. Environmental Protection Agency’s Renewable Fuels Standard, the USGC WTI-MEH weekly crack spread for the week ended February 11 averaged $14.59/bbl, surpassing the pre-pandemic level of $14.52/bbl reached in October 2019.

And with a heavy seasonal fulfillment schedule around the corner, margins are expected to increase further as the supply of refined products shrinks. Platts Analytics predicts 2.7 million bpd of U.S. refining capacity will be offline in February, rising to nearly 3 million bpd in March, as refiners expect a heavy turnover season .

Displacement of raw streams of acids and sweets

The ability of USGC’s complex refining capacity to use heavier, higher sulfur crudes gives it a price advantage in the world market for coking margins.

High natural gas prices in Europe continue to benefit USGC refiners as European refiners switch from medium-sulphide crudes like Russian Urals in favor of lighter, less acidic crudes to conserve hydrogen usage.

The discount held by the Russian Urals against the North Sea fortieths averaged $7.32/bbl for the week ending February 11, compared to $5.60/bbl the previous week and well above the 2019 average discount of $2.70/bbl, according to Platts price assessments.

Even though the price of the Dutch TTF benchmark natural gas contract softens from the $45/MMBtu level seen in mid-December, the average price of $25.51/MMBtu for the week ended February 11 remains at a multiple of the 2019 and 2020 average levels of $4.43/MMBtu and $3.20 MMBtu, respectively, according to Platts valuations.

“That’s over $150 oil equivalent,” Nimbley said.

The bias of European refiners and some Asian refiners for lighter, sweeter crudes has created a supply shortage for the grade, highlighting U.S. Gulf Coast refiners capable of handling heavier crudes.

According to PBF’s Nimbley, the high cost of natural gas weighs $3-5/bbl on the operating costs of European refiners, which is “in our opinion a benefit for the United States, or at least for our system , given the size and complexity of and the cost we incur.”

Throughout the fourth quarter earnings period, analysts wondered if a structural refining shift was underway.

“My personal view is this: this is…maybe the first or second example of going into the energy transition with a…set of goals, but maybe not a strategy and a business plan. thoughtful execution,” said Nimbley.

“You’re closing nuclear plants, you’re closing coal plants and now you’re starting to close fossil fuel plants to rely on solar and wind power. And if that’s not available…it becomes a problem” , Nimbley added, noting that in his view “we will see more examples of this as we move forward.”

US Atlantic Coast Refining Margin Averages ($/bbl)

Source: S&P Global Platts Analytics

US Gulf Coast refining margin averages ($/bbl)

Source: S&P Global Platts Analytics

US Midwest refining margin averages ($/bbl)

Source: S&P Global Platts Analytics

US West Coast Refining Margin Averages ($/bbl)

Source: S&P Global Platts Analytics

Average refining margins in Singapore ($/b)

Source: S&P Global Platts Analytics

Average ARA refining margins ($/b)

Source: S&P Global Platts Analytics

Average refining margins in Italy ($/b)

Source: S&P Global Platts Analytics