Crack Spread Says Good Riddance to Summer; Drops 50% From Late July

U.S. inventories of distillate — especially ultra-low-sulfur diesel (ULSD) and heating oil — are at their lowest pre-winter level in three years after falling during the summer months for the first time since inventory records started being measured in 1982. Rising diesel exports are one culprit; another is the shutdown of a number of Gulf Coast refineries during and immediately after Hurricane Harvey. The good news is that distillate prices have been increasing, as have the margins for refining crude oil into distillate — both encouraging refineries to ramp up their diesel/heating oil production. Today, we look at recent developments in the distillate market and what they may mean for diesel and heating oil prices this winter.

Recent third quarter earnings reports from US refiners have reflected lower refining margins squeezed by higher feedstock prices for inland crudes like West Texas Intermediate (WTI) rising to the same level as coastal crudes like Light Louisiana Sweet (LLS) while product prices stood still. In the past two weeks domestic crude prices have fallen below $100/Bbl in the face of a Gulf Coast supply glut. But despite lower crude costs, refinery margins have continued to weaken. The primary culprit has been sharply falling gasoline prices. Today we review what Gulf Coast refiners could do to improve margins.

Fundamental to our approach to energy markets at RBN is a view that natural gas, crude oil and NGLs have become much more interdependent than in the days before shale.  What happens in gas impacts NGLs, which influences crude oil, which loops back to the natural gas market.  We’ve written about these cross-commodity relationships in a number of RBN blogs during 2012, showing the calculations and walking through several spreadsheet models.  Now we are taking our analysis one step further.  Starting on December 31, 2012, we are launching a new RBN website feature called Spotcheck that displays daily updated graphs of these relationships.  Today we’ll describe what is coming next week, and how you can interpret the trends to better understand developments in North America hydrocarbon markets.