The future of two Louisiana crudes is uncertain as a key refinery is converted into a terminal following a prolonged outage from damage sustained during a major late-summer hurricane.
Phillip 66's plan to turn its 250,000 b/d Alliance refinery into a terminal will forever take off line about 7pc of the 3.44mn b/d nameplate capacity of Louisiana refineries, and eliminate one of three key buyers in the region of Light Louisiana Sweet (LLS) and Heavy Louisiana Sweet (HLS) crudes.
Going into 2022, this could lead HLS and LLS to lose some of their premiums relative to other key Gulf coast grades, like West Texas Intermediate (WTI) at Houston, and Mars. Already HLS and LLS differentials were uncharacteristically low versus WTI and Mars during the 2021 trading year, especially in the winter trading season when increased demand for heating oil usually drives up HLS differentials because of its high distillate yield.
This was spurred by decreased local demand for HLS and LLS as Alliance and Shell's 250,000 b/d Norco refinery went off line following Hurricane Ida, leaving Chevron's 365,000 b/d Pascagoula refinery as the crudes' main demand center.
The two refineries accounted for about 14.5pc of the 3.44mn b/d nameplate capacity for Louisiana refineries.
While HLS maintained its premium over Mars, the spread between the two grades narrowed to an average $1.30/bl in the 2021 trading year, down from about $3.40/bl in the 2019 trading year, prior to the onset of the Covid-19 pandemic and also down from about $2.20/bl over the last five trading years.
The relationship between LLS and WTI at Houston mirrors a similar pattern. On average for the 2021 trading year, LLS maintained a premium over WTI at Houston — but this was much narrower than in the past and it even flipped to a discount in the December trade month closing 2021 trade.
LLS and WTI at Houston's average spread during the 2021 trade year was 56¢/bl, with LLS typically at a premium to WTI at Houston. This compares to just under a $1.10/bl average spread in the 2019 trade year and a 96¢/bl five-year average spread.
For now, LLS and HLS are poised for a similar track record in 2022. Gulf coast pipeline volumes for January delivery of HLS averaged about a $1.45/bl premium over Mars. LLS averaged about a 60¢/bl premium over WTI at Houston. This came even amid wide expectations that Shell was gearing up the restart of its Norco refinery.
Should HLS and LLS' weakness versus Mars persist as the Alliance refinery disappears, the crudes could look to export markets to boost values. LLS is a commonly sought-after grade by the Dominican Republic's state-owned Refidomsa, and it has previously been purchased for delivery to eastern Canada, Jamaica, Chile and India.
