U.S. Refineries Are Capturing a Historically High Portion of the Value of Crude Oil

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.

2012 has not been a good year for natural gas liquids prices.  Spring was a particularly brutal season, with prices falling to levels not seen since the bad ole days of 2009.  This summer prices have recovered from late-June lows, but the numbers are still in the dog house relative to the past couple of years.  Although this is hardly something that sprung up overnight, lately it seems like there has been a rash of hand wringing by analysts, rating agencies and not a few companies warning about the consequences for midstream businesses and NGL producers.  Our friends at Tudor Pickering called it a ‘Blood Bath’.  Is it really that bad?  Our blog series in March called 2012 the ‘Golden Age’ of gas processors. Have we gone from a Golden Age to a Blood Bath in six months?  It seems like it’s time for another deep dive into gas processing and NGL production.

Over the past few weeks, many U.S. refiners reported even-stronger-than-expected first-quarter results, and it’s likely their good fortune will continue. Why? Despite the skyrocketing price of crude oil — refiners’ primary feedstock — the prices of the gasoline and diesel they produce have risen even more. And it’s that now-yawning gap between crude oil and refined-products prices that’s been driving refining margins — and refiners’ profits — to near-historic levels. Refining margins, like the character and capabilities of thoroughbreds like “Rich Strike” in Saturday’s amazing Kentucky Derby, are unique to each refinery because of their different sizes, equipment and crude slates (among other things), but there’s a tried-and-true way to estimate the refining sector’s general profitability, as we discuss in today’s blog on U.S. refiners’ sky-high crack spreads.