US refineries have been enjoying some very good times over the past couple of years. Most importantly, refining margins have soared due to a tight global product supply/demand environment caused by, among other things, the recovery in post-COVID demand, refinery shutdowns, effects of the war between Russia and Ukraine and the high prices of natural gas. Traditionally, most refining margins come from (1) robust “crack spreads” (the general yardstick for measuring the overall health of the refining sector, simply by differentiating between a basket of refined products and key crude markets light sweet such as WTI Cushing or MEH) and (2) the lower crude input costs that many refineries benefit from, either due to locational advantages or their ability to process low-cost crudes such as acids medium and heavy But location discounts have been reduced in recent years due to pipeline construction and, as we discuss in today’s RBN blog, the large quality discounts that complex refineries enjoyed for much of the ‘last year and the first months of 2023 have faded away. The question is, why?
A little over a year ago, in a two-part blog series (Cracking Up, Part 1 i Part 2), we talked about the sky-high margins enjoyed by American refineries at the time and what drove them. We also reviewed two common and widespread measures of refining profitability: the 3-2-1 and 2-1-1 crack spreads, which represent the operations of a hypothetical refinery. (A 3-2-1 crack spread is the difference between the cost of three barrels of crude and the sum of two barrels of gasoline plus one barrel of diesel, and a 2-1-1 crack spread is, you guessed it , the difference between the cost of two barrels of crude oil and the sum of a barrel of gasoline and a barrel of diesel.) We’ve also noted that if you’re looking for more sophisticated regional margins to varying degrees, we’ve got them covered in our fortnightly Refinery poster biannual report The future of fuels report
In any case—and logically enough—refining margins depend to a large extent on the input costs incurred by refiners and the prices they receive for the refined products they manufacture. In terms of input costs, many refiners benefit from their ability to access and use crude at discounted prices. These discounts may come from their ability to process cheaper crudes (due to quality issues such as sulphur, impurities or distillation profile) or locational advantages (the ability to take advantage of bottlenecks logistics bottle and the strong growth in production in the US and Canada). As we said in the introduction to today’s blog, location-related discounts have generally been shrinking over the past few years, being squeezed by pipeline construction, a topic we’ve covered in several previous blogs (such as Even Flow).
