- Flattening contango increases crude cargo availabilities supporting margins.
- Economics dictate the buying of more local barrels, helping them cut higher working capital costs associated with imported crudes.
- Waterborne crude imports have been declining for several years as North American crude production has risen.
US refinery margins gained traction last week, led by rising gasoline and diesel demand as regions reopened from coronavirus lockdowns – and just in time to refine April’s flotilla of Saudi cargoes just now arriving on US shores, an analysis from S&P Global Platts showed.
However, that could be the last hurrah for such a large volume of US crude imports, as the economics dictate the buying of more local barrels, helping them cut higher working capital costs associated with imported crudes.
Imported crude margins
Between May 6 and May 20, about 12.7 million barrels of Saudi Arabian crude arrived in the US, according to US Customs Data – a result of higher Saudi Arabian crude output in April as the kingdom sought to snag market share after the collapse of March’s OPEC+ meeting.
The majority of the barrels entering the US went to US Gulf Coast refiners, who saw margins benefit from the imported crude.
USGC cracking margins for Arab Light averaged $2.34/b for the week ended May 22, outshining those of local Light Louisiana Sweet which averaged $1.85/b, according to margin data from S&P Global Platts Analytics.
On the West Coast, Chevron received about 1.9 million barrels of Arab Light into its two California refineries during that time frame, and crude’s USWC coking margin averaged $11.29/b for the week ended May 27, higher than some more local crudes.
Preference to the local crude
Now that Saudi Arabia has reined in production, and global oil demand is still climbing out of the deep trough resulting from coronavirus-related shutdowns, US refiners are finding better value from more local crudes for a variety of reasons.
Even though freight rates have declined after April’s ship-fixing frenzy by Saudi Arabia freed up vessels, the market contango has flattened, making it less economic to store crude and putting cargoes on offer as barrels come out of storage.
US refiners are “optimizing their needs by local crude rather than long-haul crude,” said Chris Midgely, head of Platts Analytics in its weekly coronavirus webinar.
Waterborne crude imports have been declining for several years as North American crude production has risen. Total OPEC imports averaged 1.48 million b/d in 2019, compared with the 2.6 million b/d in 2018, Energy Information Administration data showed.
The sharp, quick drop in the price of crude and fall off in demand starting in mid-March hit US refiners’ bottom lines hard, unleashing a spate of capital spending cuts, austerity programs, and sending many to capital markets as a way to ensure enough cash liquidity to run their business.
Erik Young, PBF Energy’s chief financial officer, said the six to eight week lag in crude payment terms has put the company in a “net payable position” during a time of a steep price declines, which is eating into cash flow.
“We probably carry 10 days’ worth of receivables and anywhere from 20-30 days’ worth of hydrocarbon-related payables,” he said on PBF’s May 15 first quarter results call.
US barrels at home
For the most part, USGC and US Midwest refiners are seeing better margins from North American crudes. Even though Bakken production has been cut to roughly half of what it once was, Midwest Bakken cracking margins averaged $1.40/b for the week ended May 27, while Syncrude cracking margins were $3.16/b.
On the US Gulf Coast, WTI MEH cracking margins averaged $2.38/b for the week end May 27, compared with the $2.85/b the week earlier. However, the arbitrage for sending WTI MEH to Asia and Europe is closed, Midgely noted.
While WTI MEH cracking margins in China rose week on week, they remain firmly ensconced in negative territory, averaging minus $2.80/b for the week ended May 27. This compares with the minus $3.27/b a week earlier as the country moves forward in returning to more normal post-coronavirus life.
Saudi’s Arab Light cracking margins averaged $1.99/b the last two weeks, making it a more attractive crude for Chinese refiners.
European margins for WTI MEH also remained out of the money. For the week ended May 27, northern European refiners averaged negative $2.01/b running WTI MEH compared with the 42 cents/b for running more local Forties.
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Source: Platts
