Release date: February 13, 2019 | Next release date: February 21, 2019
Low gasoline crack spreads and high crude oil feedstock costs reduce U.S. Gulf Coast refinery margins
The U.S. Energy Information Administration (EIA) estimates that margins for U.S. Gulf Coast refiners have declined to the lowest levels since late 2014, based on recent price trends in certain grades of crude oil and petroleum products. Although EIA estimates U.S. refiners will be able to find alternative sources of crude oil supply, recent crude oil supply reductions from members of the Organization of the Petroleum Exporting Countries (OPEC) and Canada along with threat of production disruptions in Venezuela have disproportionately reduced the availability of medium and heavy grades of crude oil with high sulfur content and increased the prices of these oils relative to other grades. In addition, gasoline crack spreads have been mostly negative since November 2018 and are further contributing to low refiner margins. Despite the low gasoline margins, refinery runs remain relatively high because of strong distillate prices.
Refining margins in the U.S. Gulf Coast are typically among the world’s highest because, among other factors, Gulf Coast refineries have upgraded equipment to refine lower-cost heavy crude oils into more valuable refined products. Their complexity also facilitates relatively high yields of distillate and jet fuel and low yields of residual fuel oil compared with simpler refineries. A 5:3:2 crack spread (which expresses a higher distillate yield than a typical 3:2:1 crack spread) with Mars—a medium, sour crude oil produced in the U.S. Gulf of Mexico—reflects the low refinery margins (Figure 1). The five-day moving average of a Mars 5:3:2 crack spread (yielding three barrels of gasoline and two barrels of distillate per five barrels of Mars crude oil) fell to $5.89 per barrel (b) on January 29, the lowest since December 2014.
Increased prices of medium and heavy crude oils with higher sulfur content compared with light, sweet crude oils contributed to the lower 5:3:2 crack spread. The reduction in oil production from OPEC countries and Canada and the threat of production disruptions in Venezuela are likely increasing the relative prices of medium and heavy crude oils. These countries tend to produce medium and heavy grades of crude oil with higher sulfur content, so a large share of the global oil supply reductions in January has been of this quality. Because U.S. Gulf Coast refineries have upgraded equipment such as cokers, they typically process oils of lower API gravity and higher sulfur content, which are typically less expensive than light, sweet crude oils. Since December, however, the prices of medium and heavy crude oils have increased relative to light, sweet crude oils. For example, the five-day moving average of the Mars–Light Louisiana Sweet (LLS) crude oil price spread narrowed to nearly -$1/b in late January after trading between $3–$4/b below LLS for most of 2017 and 2018 (Figure 2).
In addition to higher crude oil costs, U.S. Gulf Coast refiner margins have declined because of low gasoline crack spreads due, in part, to high inventory levels. Gasoline crack spreads typically decline to their lowest lowest levels of the year in the winter months, but this winter has seen some of the lowest crack spreads on record. Futures prices for gasoline crack spreads compared with Brent crude oil futures prices have been negative for most trading days since November 2018, and spot Gulf Coast gasoline crack spreads with Mars crude oil fell below $0/b in late January 2019. Crack spreads increased in the first week of February but remained well below average through February 12 (Figure 3).
Gasoline inventories are high in every major storage hub globally and are likely contributing to low crack spreads. As of the first week of February, inventories were 15% and 24% higher than their five-year (2014–18) averages in Singapore and the Amsterdam, Rotterdam, and Antwerp (ARA) hubs, respectively. In the U.S. Gulf Coast, gasoline inventories reached an all-time high of nearly 91 million barrels for the week ending January 11, declining to 11% higher than the five-year average by February 8. In contrast to gasoline inventories, distillate inventories remain comparatively low in global trading hubs, which is likely contributing to ultra-low sulfur diesel (ULSD) crack spreads remaining comparatively high. In Singapore, ARA, and the U.S. Gulf Coast, distillate inventories were 2%, 19%, and 1% lower than their five-year average levels, respectively, as of the first week of February in Singapore and ARA and the second week of February in the U.S. Gulf Coast (Figure 4).
Seasonal patterns typically indicate that gasoline crack spreads—and likely 5:3:2 crack spreads—could begin to increase. As refiners enter maintenance season and as gasoline consumption increases seasonally, stocks are likely to decline. In the February Short-Term Energy Outlook (STEO), EIA forecasts that U.S. gasoline inventories will decline by 19 million barrels from the end of January through the end of April. The Mars–Gulf Coast gasoline crack spread has increased between $1.55/b and $11.50/b from January to April each year since 2011, but this year’s increase could be lower because of the already high inventory levels in the United States and globally.
U.S. average regular gasoline price increases, diesel price unchanged
The U.S. average regular gasoline retail price rose more than 2 cents from the previous week to $2.28 per gallon on February 11, down 33 cents from the same time last year. Midwest prices rose 7 cents to $2.15 per gallon, Gulf Coast prices increased nearly 3 cents to $1.96 per gallon, and West Coast prices rose nearly 1 cent to $2.92 per gallon. East Coast and Rocky Mountain prices each fell nearly 1 cent to $2.24 per gallon and $2.17 per gallon, respectively.
The U.S. average diesel fuel price remained at $2.97 per gallon on February 11, nearly 10 cents lower than a year ago. Midwest prices rose 1 cent to $2.85 per gallon. Rocky Mountain prices fell more than 1 cent to $2.87 per gallon, East Coast prices decreased nearly 1 cent to $3.03 per gallon, and Gulf Coast prices fell less than 1 cent, remaining virtually unchanged at $2.78 per gallon. West Coast prices were unchanged at $3.44 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 0.7 million barrels last week to 58.2 million barrels as of February 8, 2019, 4.9 million barrels (9.2%) higher than the five-year (2014-2018) average inventory levels for this same time of year. Gulf Coast inventories increased by 2.7 million barrels, while Midwest inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.8 million barrels, and Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 10.5% of total propane/propylene inventories.
Residential heating fuel prices decrease slightly
As of February 11, 2019, residential heating oil prices averaged $3.18 per gallon, less than 1 cent per gallon lower than last week’s price but almost 5 cents per gallon higher than last year’s price at this time. Wholesale heating oil prices averaged $2.02 per gallon, nearly 1 cent per gallon less than last week but almost 4 cents per gallon above last year’s price.
Residential propane prices averaged $2.43 per gallon, less than 1 cent per gallon lower than last week and 14 cents per gallon lower than a year ago. Wholesale propane prices averaged $0.77 per gallon, over 5 cents per gallon lower than last week and 29 cents per gallon lower than a year ago.
Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 02/11/19 | Week | Year | |
| Gasoline | 2.276 | 0.022 | -0.331 |
| Diesel | 2.966 | 0.000 | -0.097 |
| Heating Oil | 3.180 | -0.002 | 0.047 |
| Propane | 2.432 | -0.003 | -0.144 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 02/08/19 | Week | Year | |
| Crude oil | 52.72 | -2.54 | -6.48 |
| Gasoline | 1.446 | 0.009 | -0.254 |
| Heating oil | 1.909 | -0.004 | 0.054 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 02/08/19 | Week | Year | |
| Crude oil | 450.8 | 3.6 | 28.7 |
| Gasoline | 258.3 | 0.4 | 9.2 |
| Distillate | 140.2 | 1.2 | -1.2 |
| Propane | 58.168 | 0.651 | 12.527 |