Refining margins in the US Gulf coast are approaching — and sustaining — highs hot seen since 2017's Hurricane Harvey, but the high cost of compliance with the renewable fuel standard (RFS) program continues to pull the reins on refinery throughputs.
Gulf coast refining margins, as measured against WTI Houston crude based on a 3-2-1 yield, rose to $18.90/bl this week, the second highest level since September 2017, when Hurricane Harvey hit Texas and briefly lifted product prices to multi-year highs. Gulf coast margins have maintained above $18/bl for the past five session. Outside of Harvey, refining has not been this profitable since 2015.
Crude inputs at Gulf coast refineries rose to 8.54mn b/d during the week ended 30 April, the highest level since late March 2020, according to data from the US Energy Information Administration (EIA).
Refinery throughput has steadily risen since February's winter storm, but rates remain below pre-Covid-19 levels. This is in large part because of the hike in renewable volume obligation prices (RVO), a credit aggregate that represents a cost to refiners for producing gasoline and diesel in compliance with the federal RFS mandates.
Argus-assessed RVO reached 19.61¢/USG, or $8.24/bl, on 5 May, a record high. Uncertainty over the volume of overdue and future blending requirements and pending court cases, including at the US Supreme Court, have sent the RVO to record levels. These levels are likely to persist at least through June, if not longer.
Refining margins with RVO subtracted averaged $10.72/bl over the past month, still relatively high in post-Covid-19 terms, but lower compared with the $12.79/bl average in April 2019.
In addition to high RVO, a string of secondary unit maintenance could also have limited crude unit runs. April was a particularly heavy month for fluid catalytic cracker (FCC) outages at Gulf coast refineries. This exacerbated an existing imbalance between crude and secondary unit runs that has led to an excess of intermediate feedstocks. Most of these FCC outages have restarted as of early May.
Strong summer could tighten supply slack
A strong surge in summer gasoline demand could give refiners the boost they need to bring operations back to pre-Covid-19 levels.
Prices already rose this spring as markets transitioned from winter to summer grades, and the return of the seasonal lift after last year's demand distortion could last into the fall.
Many in the industry are expecting a strong summer driving season as continued US vaccinations are expected to reach a majority of adults and even teenagers in the US by late summer.
Recovering travel demand is also expected to boost jet fuel margins, partially alleviating one of the biggest obstacles to refiners bringing crude throughputs higher since last May.
Gulf coast jet fuel margins averaged $7.05/bl in April, down from $13.08/bl in April 2019.
