REFINERY MARGIN TRACKER: US margins move up as crude spreads widen

New York — US refinery margins moved up last week as key crude spreads widened, increasing both margins and cracks so far in the fourth quarter, an S&P Global Platts analysis showed Nov. 9, a trajectory seen accelerated by news over the weekend that a coronavirus vaccine is on the horizon.

US Gulf Coast cracking margins for WTI MEH gained $1/b week on week, averaging $6.54/b for the week ending Nov. 6, according to S&P Platts Global Analytics. So far in the fourth quarter, USGC WTI MEH cracking margins are averaging $5.60/b, outpacing $5.09/b in the third quarter.

"We saw some very, very narrow crude quality quarter differentials in third quarter," said Gary Simmons, Valero's head of commercial operations, on Oct. 22 in a third-quarter results call. "We got some OPEC production back in August. Additionally, you had storms in that affected the Gulf of Mexico medium sour production. So, getting some of that production online has helped."

The price spread between front-month Light Louisiana Sweet and Mars averaged 51 cents/b in the third quarter and has widened to $1.06/b so far in the fourth quarter, according to Platts price assessments, as medium sour grades like Mars and Poseidon come back on line as the storm season tapers down.

Increased production and wider spreads helped drive USGC coking margins gains. Mars coking margins averaged $4.96/b for the week ended Nov. 6 compared with $3.90/b the week earlier. Fourth-quarter margins at $3.91/b are on track to exceed third-quarter margins of $2.84/b.

Light at the end of the tunnel

But margins across the board in the fourth quarter this year continue to lag those of Q4 2019, Platts Analytics data shows, as coronavirus lockdowns limit personal mobility and demand for transportation fuels and cut refined product prices.

However, news from pharmaceutical manufacturers Pfizer and BioNTech that their coronavirus vaccine could be more than 90% effective and will be available in the near future spiked oil prices Monday, signaling the possibility of a healthy rebound for global refined markets lay within reach.

"With OPEC maintaining tight control and media reports of extended cuts until year-end 2022, crude markets were already healing," Credit-Suisse analyst Manav Gupta said in a Nov. 9 research note.

"The problem was the product markets and especially the overhang of surplus jet fuel," he added. "We believe that's where the vaccine will be most effective. We believe that if jet fuel demand can pick up, diesel inventory will draw and margins will stabilize. While we expect all of energy to participate in today's relief, we expect the refiners to lead."

Lockdowns to prevent the coronavirus from spreading have cut drastically into US gasoline, diesel and jet demand, which dropped in April by 50%, 70% and 30% respectively, US Energy Information Administration data showed.

Relative to the second quarter, US gasoline, diesel and jet demand improved by 25%, 7% and 57% respectively, in the third quarter, according to the EIA data, but not enough to improve refinery utilization, which as of Oct. 30 was about 13% lower than the normal seasonal average, EIA data showed.

Vaccine trade

Jet demand was the hardest hit of all the transportation fuels by the lack of personal mobility wrought by the coronavirus lockdowns. Despite best efforts by airlines to make travelers feel safe, air traffic suffered greatly and government regulations restricting travel between countries severely hampered demand.

As a result, refiners minimized jet fuel production and put any jet produced in the distillate pool. Widespread refiner sentiment expressed on third-quarter calls was that once jet demand picks up, so will refinery utilization and margins.

Valero's Simmons said once jet fuel demand and prices start to rise "you'll start to see that result in higher utilization."

The advent of a new vaccine will likely increase air travel as well as other travel, something refiners have been looking forward to.

PBF CEO Tom Nimbley said on an Oct. 29 call the company saw few reasons to raise utilization "until there is a widely available medical solution that allows greater freedom of movement, increased business and personal travel."