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Houston —
The US refining complex processed more crude oil in the third quarter of 2018 than any other third quarter on record — a trend refiners attributed to cheaper North American crude streams, most notably from the infrastructure-constrained Permian Basin and Western Canada. While these two oil patches have rather different infrastructure outlooks in the long term, sources said they expect crude discounts to remain in these areas in Q4, leaving US refineries on solid footing for another watermark quarter.
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“Q4 refinery runs will vary by region. Those in the Gulf Coast and Midwest with access to cheap crudes will either get stronger or stay at current levels. East Coast refineries buying LLS and Brent will probably not,” one gasoline trader said.
A second gasoline trader said he expects another record breaking quarter in Q4, or at least a continuation of refinery runs above historic norms.
US Energy Information Administration data showed July through September, US gross crude oil refinery input averaged 17.746 million b/d, its highest rate in Q3 in data as far back as 1990.
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This trend may seem puzzling for those focused on prices in Cushing, Oklahoma — the US’ most important oil hub — where S&P Global Platts data showed front-month WTI crude oil was badessed at an average of $69.63/b in Q3, more than 45% above the Q3 2017 average.
But a closer look at North American crude markets paints a more nuanced picture: although Q3 WTI in Cushing rallied higher year on year, crude oil in Western Canada and Texas’ Permian basin traded at notable discounts to both US and international oil benchmarks. This is due “a huge logistics bottleneck” in these areas, the first gasoline trader said.
Platts data showed the discount for WTI crude oil in Midland, Texas — near the Permian — against the same barrel at the Magellan East Houston terminal — a location prime for USGC refinery demand and access to water for export — reached unprecedented levels in Q3, averaging $18.33/b, up from the prior three-year average of $2.11/b.
Western Canada has similarly seen local crude oil grades versus NYMEX WTI CMA reach unseen discounts. In Q3, Western Canadian Select in Hardisty, Alberta, was badessed at an average discount of $27.94/b to WTI CMA, up from the prior three-year average of $13.31/b.
DISCOUNTED CRUDE FUELS Q3 EARNINGS
US refineries do not purchase crude directly from the Permian Basin near Midland Texas or from Hardisty in British Columbia. They must always deal with shipping costs. However, multiple US refining companies specifically cited cheaper North American crude oil streams — relative to international prices — in earnings calls for their stellar Q3 performance.
During his company’s earnings call, Joseph W. Gorder, CEO of Valero, said “discounts relative to Brent remained very attractive,” which he said helped Valero’s “refinery utilization exceed 99%,” with the company setting a new record for processing light sweet crude. More than half of the crude processed in Q3 came from the USGC, which presumably included sizable volumes of discounted Permian oil.
Similarly, Phillips 66 Chairman and CEO Greg Garland said during the Q3 earnings call that his company was “the industry’s largest purchaser of heavy Canadian crude,” allowing its refineries to run “at record levels.”
Energy economist Philip Verleger said that companies such as Philadelphia Energy Solutions, or PBF Energy, with capacity concentrated on the East Coast, had a much more difficult time financially in Q3, which is evidenced in East Coast refinery runs. EIA data showed Q3 East Coast gross crude oil input into refineries was down over 3 million b/d from the prior three-year average.
PERMIAN, WESTERN CANADIAN CRUDES FACE DIFFERENT FUTURES
In the Permian, a bevy of brownfield and greenfield pipeline projects are under way to alleviate takeaway constraints. Most recently, Plains All American’s 500,000 b/d Sunrise Pipeline expansion came online in November — though it is not currently running near full rates — and Platts Analytics believes current Permian take-away capacity could more than double from now to mid-2020.
The Intercontinental Exchange WTI Midland swap currently weakens into May 2019, when it bottoms out at minus $7.55/b to WTI at Cushing, Oklahoma, roughly $2.65/b weaker than the current front-month December, according to Friday settlements. From May 2019, the market expects takeaway to improve, and the differential flips to a contango structure. The cal-2019 swap averaged minus $4.55/b Friday and the cal-2020 swap averaged 5 cents/b more than WTI at Cushing.
By contrast, increased pipeline takeaway is not expected in Western Canada in the short term, which has led to a rise in crude by rail volumes and recent announcements by producers to shut in production. Last week, a US judge blocked any a new construction on the controversial Keystone XL Pipeline, citing environmental concerns.
CME Group’s Western Canadian Select swap shows a near-term rise in differentials before stabilizing around $25/b less than WTI at Cushing. On Friday, the cal-2019 swap averaged about minus $27.45/b and cal-2020 was minus $25.60/b, on either side of the average spot price in 2018 so far: minus $26.70/b, Platts data showed.
Looking ahead to the end of 2018, Philip Verleger said he sees room for US refineries to have a record-breaking fourth quarter for crude processing as discounts in these regions persist.
–Seth Clare, [email protected]
–John-Laurent Tronce, [email protected]
–Edited by Pankti Mehta, [email protected]
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