Nat gas advantage for US refiners narrows
OREANDA-NEWS. June 06, 2016. Falling first quarter crude prices cut the advantage low natural gas prices give US refiners to its lowest level in five years, the latest erosion to the industry's shale-driven boon.
The contraction helped compress first quarter profits for US independent refiners though did not wipe out their global competitive edge.
Refiners rely on natural gas both to power their facilities and as a source of hydrogen. Hydrocrackers and similar units use the feedstock to produce very low-sulfur gasoline and diesel required in the US and increasingly demanded around the world.
The boom in US natural gas production in recent years drove domestic gas prices to 17-year lows in the first quarter. Outright prices for natural gas fell below \\$1.65/mmBtu, down 40pc from a year earlier and slashing operating costs for US independent refiners. But the industry measures its advantage over the competition in the fuel's discount to Brent crude benchmark. Crude prices, which natural gas prices follow, fell even faster.
The US discount for natural gas relative to Brent compared to European competition during the first quarter narrowed to its lowest level since the third quarter of 2010, down by almost half from the previous year.
US prices were \\$13.27/bl better for refiners during the first quarter 2016 than in Europe, down from a \\$25.47/bl spread the same quarter last year and a peak of \\$40.58/bl in the first quarter of 2012.
US independent refiner Valero saved \\$26mn on outright natural gas costs for the first quarter of 2016 compared to 2015, yet its margins shrank by \\$110mn over the same period as the natural gas advantage narrowed.
The spread widened in the US industry's favor through April and May of this year but remains at its narrowest second quarter average since 2010.
Consultancy Turner Mason estimates that the US regional refining advantage compared to Asia and Europe shrank by roughly a dollar over the past two years, to refining cost discount ranging between 67?/bl to \\$1.59/bl in 2015.
Refiners still hold crude and natural gas advantages over global peers, but the contraction will keep a lid on windfall profits, Turner Masonexecutive vice president John Auers said
"We might never see — certainly for an extended period of time — the blowout profits we saw in 2011, 2012, and 2013," Auers said.
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