Fitch: Lack of Distillate Uplift Tests US Refiner Profitability
Lack of winter heating oil demand has pushed distillate inventories above 160 million barrels (bbl) as of early April versus historical averages of less than 130 million bbl, according to recent EIA data. With little incentive to produce additional distillates, some US refiners switched over early to gasoline, leading to an unseasonable build in gasoline inventories. As a result, gasoline stocks were moderately overbuilt but have since seen supportive draws. As of early April, they stood at 244 million bbl but were a more moderate 24.3 days of implied inventory when scaled against underlying demand.
Over the longer term, pressures remain on gasoline in the form of unfavorable environmental regulations, including rising renewable fuels mandates, higher mandatory fuel (CAFE) standards and greenhouse gas emissions regulations, although the recent skew in auto sales toward SUVs, crossovers and light trucks should help offset this somewhat.
Crack spreads contracted notably from last year's strong levels. Benchmark Gulf Coast 321 crack spreads in first-quarter 2016 were about 40% below year-ago levels, averaging \\$9.16/bbl versus \\$15.37 in 2015. Midcontinent crack spreads were down a comparable level, while NYH 321 spreads fell a more moderate 21%, having experienced less of a run-up in prior years. Key crude spreads have dropped sharply lower in line with lower oil prices, removing a windfall for midcontinent and other location- advantaged refiners. This includes the Brent-WTI spread, which has averaged \\$2.60/bbl versus a five-year average of over \\$11/bbl, and a WTI-WTS spread, which averaged just \\$0.12/bbl versus a five-year average of \\$4.30/bbl).
We are expecting to see a modest reflation in spreads as oil prices rise, although they are unlikely to return to levels seen over the past few years given that the crude export ban has been lifted.