Crude Summit: Marine fuel changes not so sweet

Imminent changes to global shipping fuels may not force crude discounts US refiners once expected, Phillips 66 said today.

Political and logistical constraints on sour crude supplies have increased prices for North American buyers that only months ago enjoyed steep discounts. Canadian and Opec curtailments along with Venezuelan government uncertainty have helped to reduce sour volumes complex US refiners expected to drive large margins later this year.

Conditions limiting sour crude supplies should ease in the second quarter, senior vice president of marketing and commercial Brian Mandell said on the sidelines of the Argus Americas Crude Summit in Houston, Texas. But the US independent refiner, already conservative in its outlook on how low sulfur fuel demand will benefit its business, said conditions may blunt the impact of reduced demand for sour crude.

"It may not be as wide as you thought," Mandell said.

Global requirements to reduce the sulfur content of marine fuels beginning in 2020 should boost demand for low-sulfur distillates and cut demand for higher sulfur crude. Such conditions would benefit complex US refiners capable of wringing clean fuels from tough feedstocks.

But heavy crude once taken for granted in the US has faltered in supply.

Pipeline constraints and rising production helped to push Western Canadian Select discounts to the Nymex WTI CMA benchmark below $40/bl in October. Alberta's provincial government responded by seeking railcars capable of moving 120,000 b/d of crude and requiring 325,000 b/d of cuts distributed among producers to drain swollen inventories.

Prices reacted much stronger than the government anticipated. Rail and, briefly, pipeline movements of WCS became unprofitable as the constraints lifted prices.

Those limits should ease through the second quarter, Mandell said. Refiners would look for a $20-$22/bl discount to WTI at Cushing, Oklahoma, wider than the single-digit spreads seen this month but less discounted than the average $33.77/bl seen in the fourth quarter of 2018.

"The truth is you want the market to be right," Mandell said.

Phillips 66 was the single largest importer of Canadian crude in 2017 and operates two joint venture refineries with Canadian integrated firm Cenovus. The reduction, paired with cuts that began this month of Opec and non-Opec medium and heavy sour crude production and uncertainty over Venezuela's heavy crude supply, have helped sharply narrow discounts for sour crudes on the US Gulf coast.

But US refiners still hold persistent crude and natural gas advantages over global competitors, especially in the Atlantic basin, Mandell said.

"It's hard to believe that we will not be around last," he said.