Lower stocks, high demand up refiners' winter outlook

Low product inventories and strong demand have raised US independent refining hopes for the most profitable winter in years, industry executives said.

Hurricane-related shutdowns and seasonal maintenance pulled products inventories down to more than two-year lows. US Atlantic coast and midcontinent product inventories fell while strong domestic, European and Latin American demand have taxed product markets.

US refiners east of the Rocky mountains have once again enjoyed access to discounted domestic crudes. But lower products inventories and a focus on distillates production should play the largest role in setting up refiners for a profitable 2018, executives said this earnings season.

"The fact is that what is driving the margins right now is a very strong product pull that we expect to continue," PBF Energy chief executive Tom Nimbley said.

Implied ultra-low sulfur diesel (ULSD) consumption in the week to 3 November of 4.5mn b/d was almost 10pc higher than year ago levels, according to the Energy Information Administration. US diesel exports reached a record 1.7mn b/d at the end of October.

Robust demand comes at a time when domestic products markets are still recovering from an active hurricane season. Hurricane Harvey at its peak disrupted almost a quarter of US refining capacity as it flooded the Texas coast at the end of August. The storm outage interrupted roughly 3.2mn b/d of products pipeline capacity supplying the midcontinent and the Atlantic coast.

The 660,000 b/d Explorer pipeline from Texas into the Chicago, Illinois, market has shut twice over the past two months amid seasonal turnaround work. Midcontinent products volumes sank to their lowest volumes in almost three years, according to the EIA. Days of products supply, a measure of how quickly demand would empty those regional stockpiles, fell to its lowest level in six years, refiners said.

"As turnarounds are completed we expect inventories to somewhat normalize," CVR Energy chief executive Jack Lipinski said. "But again, going into year end, we are looking at improved crack spreads and we are optimistic that the overall market is recovering."

Low Atlantic coast inventories have meanwhile rekindled interest in Colonial pipeline's 1.2mn b/d diesel line from Texas into the region. Stockpiles of ultra-low sulfur diesel (ULSD) needed for heating oil in the central Atlantic — the main heating oil market in the US — fell to 32pc below year-ago levels in the week to 3 November. Nominations to ship diesel on the Colonial system to the New York Harbor began exceeding capacity last month after a rare four-month lull in demand.

An unusually warm winter left diesel inventories swollen last year. Wariness of another disappointing heating oil season tempers any rush to refill eastern stockpiles this fall, which could leave the region open to price spikes if temperatures drop. Federal forecasters expect a cooler October to March in the central Atlantic than last year, but at temperatures still warmer than normal for the season. Heating degree days, a measure of heating demand, are 1.1pc lower than the five-year average in the current forecast.

Even a brief drop in winter temperatures could spur higher prices for heating oil demand, Valero vice president of supply Gary Simmons said.

Shipments on Colonial's 1.4mn b/d gasoline-bearing main line have seen a similar, belated rise in shipping demand after months of unseasonably low interest. Gasoline stockpiles from Florida to Virginia returned to normal levels following the active hurricane season. But inventories further north trailed the five-year average by as much as 7.4pc.

Harvey's lingering effects on the crude market have kept refiners focused on domestic light, sweet barrels. US benchmark light, sweet crude has averaged a $6.15/bl discount to Ice Brent so far this quarter. A combination of quality differences and pipeline constraints have widened that spread, executives said. Midland-priced WTI crude moving to the Texas coast from Texas and New Mexico fields have averaged a 10¢/bl premium to Cushing in the quarter so far. Refiners prefer to avoid the blending that takes place in Cushing tanks. A backup of Cushing crude moving to the US Gulf coast, meanwhile, has pushed prices down at that US crude storage hub, refiners said.

US refining executives expected the Brent-WTI spread to narrow as midcontinent refining returns and the US ability to export crude improves. But with ongoing Opec-led supply cuts keeping medium sour prices higher, complex US refiners prefer sweet domestics after filling coking equipment with heavy Canadian or Latin American crude. Andeavor, Marathon Petroleum and Valero all reported sweet crudes taking the highest share of their crude units in the third quarter in at least two years.

"We are trying to take advantage of all of the WTI-priced crude that we possibly can in the system today," Marathon Petroleum vice president of supply Mike Palmer said.