Refinery Margin Tracker: Complex US refiners feel the pinch of narrower crude spreads ahead of IMO 2020 rules

New York — Most US refiners are seeing weaker coking margins ahead of sulfur limits under IMO 2020 rules as the price difference between light, sweet crudes and heavy crudes narrow, but expect spreads to widen back out as the January 1, 2020, deadline for the bunker fuel change nears, an analysis by S&P Global Platts shows.

The International Maritime Organization mandate for cleaner bunker fuel taking effect on January 1 requires sulfur content to drop to 0.50% from the current 3.5%.

US refiners with the capability to handle the cheaper heavy, sour crudes expected to reap higher coking margins in the countdown to IMO 2020, but a lack of heavy sour barrels has mitigated expectations by raising crude prices.

US West Coast coking margins for Arab Medium averaged $11.97/b for the week ended August 2, down from the $13.14/b the week earlier, according to data from S&P Global Platts Analytics.

"We continue to navigate through the narrow light heavy differentials, the ongoing OPEC cuts, sanctions on Venezuela and Iran and the Alberta curtailment limiting supply of economic medium and heavy barrels available on the market," said PBF CEO Tom Nimbley on a second-quarter results call Thursday.

"This has put pressure on complex refineries as we are not currently being rewarded for complexity," he added.

PBF recently announced it was buying Shell's 156,400 b/d Martinez, California, refinery. PBF already owns the 160,000 b/d Torrance, California, refinery, and its easy availability of local California crude like THUMS and Line 63 helps buffer the cost of imported heavy crudes

MORE RAIL, INCREASED PRODUCTION SEEN NARROWING WCS DIFFERENTIALS

Midwestern US refiners are also feeling the pinch of narrower light-heavy spreads. Midwest coking margins for Western Canada Select averaged $17.22/b for the week ended August 2, down from the $18.51/b the week earlier, according to data from S&P Global Platts Analytics.

Marathon Petroleum ran 600,000 b/d of combined Canadian heavies and lights through its refining system in the second quarter, Rick Hessling, Marathon's head of crude supply and logistics said during Thursday's second results call.

"I think you'll see that we have incredible pipeline capabilities and we're not married to any one crude ... looking forward, from a Canadian perspective, we're bullish. Here recently within the last week, the mandate again was reduced another 25,000 b/d," he said.

"And then if you look at the increase in rail movements month-over-month and the dropping of the Canadian inventories, all this is a positive sign certainly for differentials reaching that $20 a barrel mark on the heavy side," he added.

US Gulf Coast coking margins were mixed the week ended August 2. USGC Maya coking margins averaged $9.46/b, up from $8.92/b the week earlier, while WCS ex-Nederland fell to $10.37/b from $11.57/b the week earlier.

LyondellBasell's 263,776 b/d Houston refining has just over 100,500 b/d of coking capacity and is a big buyer of Mexican Maya crude. However, the plant lacks catalytic hydrocracking and hydroreforming capacity which limits to 10% the amount of local, light sweet crude pipeline crude it can process.

About 25% of Lyondell's second-quarter crude slate was Canadian, said CEO Bob Patel on Friday's second quarter results call. But Lyondell also buys crude by rail or other non-pipeline sour crudes "which tend to be higher priced than other crudes," he added.

"High prices on the portion of heavy sour crude oil we buy on the open Houston market created a challenging market for our refining business during the second quarter. We continue to anticipate that margin benefit from the IMO 2020 regulations will bolster our refining results during September and October of this year," he said.

-- Janet McGurty, janet.mcgurty@spglobal.com

-- Edited by Derek Sands, newsdesk@spglobal.com