Global Issues Impact Oil Price

The US became a net-exporter of oil products like gasoline and diesel fuel in 2011 for the first time since 1949 and oil product exports have steadily increased since that point. US refiners found a new lease on life – after several East Coast refinery closures – by purchasing Bakken crude at a discount to global benchmarks WTI and Brent, which greatly improved refining margins. But with discounts narrowing, US refiners could again face tough times ahead.

The big move on the US product side was a 2010 to 2011 story, FACTS Chairman Fereidun Fesharaki said earlier this week at the Center for Strategic and International Studies in Washington DC. He said he expects to see another round of US East Coast refinery closures over the medium term.

“Europe has shut a lot of refining and the US escaped it, but it’s not a permanent escape,” said Fesharaki. European refiners unable to compete with cheaper imported diesel fuel from the US, Russia, India and the Middle East converted many of their plants into product terminals over the past few years.

“The idea of the US being a major product exporter is major flash in the pan,” Fesharaki said.

Chevron recently said third-quarter earnings would be lower than the second quarter due to “significantly lower” earnings from its refining division as fuel margins were squeezed. Although that refers to the company’s global operations, reported US refining margins slipped from $5.73/bbl in Q2 to $4.46/bbl in Q3 on the west coast and from $5.10/bbl in Q2 to $2.40/bbl in Q3 on the east coast. Additionally, some equity analysts recently lowered their expectations for several US refining stocks including Valero, Tesoro, and Holly Frontier, according to Platts.

Bakken Prices and Differentials

Platts reported that higher third-quarter refining netbacks were trumped by higher crude supply costs and weakening differentials.

“…crude supply costs were higher during the third quarter, for both domestic and imported grades, eating into margins. Spot WTI averaged $105.75/b, up $11.68/b from Q2 2013, while North Sea Brent climbed $7.78/b over the same period to average $110.31/b in the third quarter… Meanwhile, WTI’s price discount to Brent narrowed during the third quarter as more crude has been able to exit the Cushing, Oklahoma, delivery point for WTI, and as refiners were running strong.” – Platts

The posted Bakken price recently traded at about a $15 per barrel discount to dated Brent, Bloomberg reported, and it costs roughly $12/bbl to transport Bakken crude from North Dakota to the US East Coast, limiting refiners’ profit margin.

“The price of Bakken at Clearbrook fell to the biggest discount since February 2012 versus posted prices for Bakken crude in the field in North Dakota, an indicator of what shippers will pay producers, data compiled by Bloomberg show. The spread has dropped more than $5 a barrel since Sept. 30, when it was at a premium of $2.64 a barrel, to a discount of $2.88 a barrel today…The discount of Bakken posted prices compared with Dated Brent, the benchmark for crude imports from Europe, widened to $19.58 a barrel Sept. 26, before narrowing to $15.08 today [October 3rd]. It costs about $12 to ship crude by rail to the Delaware City, Delaware, refinery from North Dakota, PBF Energy said last month.” – Bloomberg