{"id":476,"date":"2012-09-12T10:48:50","date_gmt":"2012-09-12T15:48:50","guid":{"rendered":"https:\/\/allenergyconsulting.com\/blog\/?p=476"},"modified":"2012-09-14T14:26:23","modified_gmt":"2012-09-14T19:26:23","slug":"us-refining-margin-outlook-sept-2012","status":"publish","type":"post","link":"https:\/\/allenergyconsulting.com\/blog\/2012\/09\/12\/us-refining-margin-outlook-sept-2012\/","title":{"rendered":"US Refining Margin Outlook Sept. 2012"},"content":{"rendered":"

The refining outlook has been impacted by two major fundamental changes in the crude oil market.\u00a0 The first major change is the new crude oil price regime, driven by increase demand from Asia and partially due to global monetary policy from central banks.\u00a0 In relative short time, crude oil markets have moved into the $100\/bbl environment.\u00a0 From the 80\u2019s to 2000 prices stayed in the range of $20-40\/bbl.<\/span><\/span><\/p>\n

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Since 2003 oil prices continued to climb and only very recently have settled into a range $80-100\/bbl.\u00a0\u00a0 Given the much higher crude oil prices, refining margins seen in the 80\u2019s to 2000 will likely not be comparable on an absolute basis.\u00a0 On an absolute basis the current margins would be deemed as historical by multiple factors.<\/span><\/span><\/p>\n

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A certain amount of the WTI crack spread can be attributed to the current disconnect between WTI and the USGC, which represents the product part of the spread.\u00a0 The difference in the WTI crack spread can be attributed to the region \u2013 Cushing, Oklahoma \u2013 existing infrastructure.\u00a0\u00a0 The WTI \u2013 Brent Spread is producing a historical discount to Brent.\u00a0\u00a0 This is translated to the WTI \u2013 LLS spread, to a lesser extent.<\/span><\/span><\/p>\n

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However, this spread is not likely to exist for a substantial amount of time since the arbitrage to move oil to the USGC can easily be solved\/monetized through investments in pipeline.\u00a0\u00a0 This is already being seen in the reversal of the Seaway pipeline which will increase flows from Cushing to Gulf Coast from 150,000 bpd to 400,000 in 2013.\u00a0 In addition, there are several other discussions from the TransCanada Gulf Coast project.<\/span><\/span><\/p>\n

Besides the local issue with WTI, Brent and LLS are still showing a rather high absolute refining margin compared to history.\u00a0 This portion is attributed to the elevated price of oil which is producing a larger absolute refining margin.\u00a0\u00a0 In economic sense, it is rationale to expect a higher absolute value of return as the cost of the feedstock rises.\u00a0 On a percentage basis of the feedstock, the returns are high now, but are not historically high. <\/span><\/span><\/p>\n

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The average percentage of the 3-2-1 WTI Crack Spread \/ WTI is around 16% from 1986 to 2011.\u00a0\u00a0 The future should be expected to be around that level with perhaps a chance for it be slightly higher.\u00a0\u00a0 The rationale for this is the increase level in crude oil prices increases the carrying cost relative to a lower crude oil market.\u00a0\u00a0 In addition, the higher crude oil price has led to higher volatility.\u00a0 Both of these issues add additional cost that will likely be passed on in the market.\u00a0\u00a0 In a $100\/bbl crude oil market, a sustainable 3-2-1 crack spread for WTI should be around $16\/bbl.<\/span><\/span><\/p>\n

The next major fundamental impact for refining margins comes from the shale gas revolution.\u00a0\u00a0 As noted by several oil analysts, shale gas has and will continue to significantly alter the energy space.\u00a0 The various shale gas areas are shown in the map below.\u00a0 <\/span><\/span><\/p>\n

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Besides the natural gas production, shale gas has added significant volumes of liquids as the shale gas technology led to an increase in extractions of natural gas liquids.\u00a0\u00a0 The desire for more liquids is due to circular loop.\u00a0 In a circular fashion, the increase in natural gas production led to a lower value in gas, but with oil markets being strong the spread between oil and natural gas is the highest since 1950\u2019s.\u00a0\u00a0 This has led to increase focus on liquids rich shale gas plays.<\/span><\/span><\/p>\n

US Oil price divided by Natural Gas Price<\/span><\/span><\/p>\n

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The drive for shale gas is currently been driven by the liquid value.\u00a0\u00a0 Natural gas plays by themselves are not very economic with the current natural gas price.\u00a0 However adding the liquids economics justify some of the decisions to continue to develop gas fields \u2013 see figure below.<\/span><\/span><\/p>\n

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Based on the various USGS surveys and production trends, the liquids from shale gas should amount to an additional 400,000-2,200,000 bpd by 2020 with most of that volume needing to be exported or refined.\u00a0 A recent Morgan Stanley report evaluated the Eagle Ford and expects over 600,000 bpd of oil production by 2013 versus the current level of 170,000 bpd. \u00a0Currently the Energy Policy and Conservation Act of 1975 (P.L. 94-163, EPCA) directs the President to restrict the export of crude oil.\u00a0\u00a0 This will put pressure on US condensate prices and giving price advantages to US facilities that can process the condensate.<\/span><\/span><\/p>\n

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The volume of liquids from the shale gas play is not significant to change the overall oil markets over the next few years.\u00a0 However the volume is significant in terms of the impact on the quality differential.\u00a0\u00a0 All of the liquids from shale gas represent a category of light sweet oil \u2013 API >40 and Sulfur <1%.\u00a0\u00a0 This has caused a dramatic shift in the oil paradigm.\u00a0 For the greater part of the last two decades it was common theme to consider the crude oil slate to become heavier and higher sulfur.\u00a0 This caused the refinery industry to believe a successful refinery is one with size and technology in order to convert the heavier crude oil.\u00a0 The light-heavy differential was expected to widen significantly putting simple refineries out of business.\u00a0\u00a0 However shale gas revolution with its exclusive light liquids is reversing that trend in the US.<\/span><\/span><\/p>\n

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The impact of the lighter crude oil will be bringing a simple refinery back into positive economics.\u00a0\u00a0 In addition, without the large spread in light-heavy crude oils, highly complex refineries can actually be put in negative economics given their high variable cost.\u00a0 This is partially responsible for the Aruba and Hovensa refineries closing down.\u00a0\u00a0 Both of those facilities are designed to convert heavy crudes from Latin. America.\u00a0 In addition, those refineries are dependent on oil for its energy whereas all the gulf coast refineries can rely on natural gas.\u00a0<\/span><\/span><\/p>\n

The impact of the liquids can be directly seen in the drop of imports from light oil greater than API 45.\u00a0 Beginning in 2011, the imports of crude oil greater than 45.1 API fell by over 100 kbd.<\/span><\/span><\/p>\n

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This drop coincides with the increasing domestic production of lease condensates.\u00a0 Lease condensates as defined by the Energy Information Agency (EIA): A mixture consisting primarily of hydrocarbons heavier than pentanes that is recovered as a liquid from natural gas in lease separation facilities. This category excludes natural gas plant liquids, such as butane and propane, which are recovered at downstream natural gas processing plants or facilities.<\/span><\/span><\/p>\n

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I\u00a0believe the two fundamental shifts impacting the refining industry, higher crude oil price and increase in lighter feedstock, is sustainable for some time period (5+ years).\u00a0 The US economic solution is fixated on continued quantitative easing.\u00a0 With M2 currently producing the highest correlation for crude oil prices using data since 1981 \u2013 R^2 ~0.6 vs. world demand R^2 ~0.5 – high crude oil prices ($80+\/bbl) will likely continue into the future years.\u00a0\u00a0 Shale gas production is not likely to cease, given the high value of oil products and the cost of production being around $3-5\/mmbtu on just a natural gas basis.\u00a0\u00a0 Liquids rich plays will continue to be found and produced.\u00a0\u00a0 The combination of these fundamental shifts will result in higher absolute refining margins.\u00a0 The recipe for a successful refinery will be modified from size and technology to refineries able to minimize operating cost, given that the\u00a0complexity advantages have eroded with lighter feedstock.<\/strong><\/span><\/span><\/p>\n

Higher resolution graphics are available upon request.\u00a0\u00a0 Presentation with Q and A are also available.\u00a0\u00a0 Please do consider All Energy Consulting for your energy consulting needs.<\/span><\/span><\/p>\n

Your energy analyst,<\/span><\/span><\/p>\n

David K. Bellman<\/span><\/span><\/p>\n

614-356-0484<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

The refining outlook has been impacted by two major fundamental changes in the crude oil market.\u00a0 The first major change is the new crude oil price regime, driven by increase demand from Asia and partially due to global monetary policy from central banks.\u00a0 In relative short time, crude oil markets have moved into the $100\/bbl […]<\/p>\n","protected":false},"author":1,"featured_media":14,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,26],"tags":[173,171,91,172],"class_list":["post-476","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-oil-petroleum-products","tag-oil-markets","tag-refinery-outlook","tag-refining-margins","tag-usgc-product-spreads"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/476","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=476"}],"version-history":[{"count":6,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/476\/revisions"}],"predecessor-version":[{"id":491,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/476\/revisions\/491"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/14"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=476"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=476"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=476"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}