US midcon refiners close out profitable 3Q

US midcontinent refiners able to access a glut of Canadian heavy crude should lead their peers when they report third quarter earnings later this month.

High diesel prices and pipeline constraints slowing the flow of North American crude to US Gulf coast and overseas markets boosted the midcontinent's refiners during the late summer months. Conditions benefited Chicago market heavy refiners including ExxonMobil and Phillips 66. But the lucrative environment helped build up record product inventories that could prove a drag toward the end of the year.

Pipeline constraints and unplanned maintenance in Alberta, Canada, extended deep discounts for heavy West Canadian Select (WCS) production in July. The WCS 6-3-2-1 crack spread for Chicago leaped above $40/bl on 18 July as WCS entered the August trade month and has yet to subside. Sour crude 3-2-1 cracks on the Texas coast averaged $17.30/bl — less than half their midcontinent peers and down 18pc from the previous year.

Heavy Canadian production was not a boon to all the midcontinent, however. Most the region's refiners cannot process the heavy material, and the low prices persist because so much WCS cannot reach market.

BP's 410,000 b/d Whiting, Indiana, refinery, the individual US facility running the highest volume of heavy Canadian crude, ran above nameplate through August before helping to further depress WCS prices by shutting a large crude unit for scheduled maintenance last month.

Phillips 66, the largest US purchaser of heavy Canadian, reported steady operations at its 356,000 b/d Wood River refinery at Roxana, Illinois. Both Phillips 66 and Marathon Petroleum's 120,000 b/d refinery in Detroit, Michigan, shut units for maintenance by mid-September. The region reported the largest seven-day drop in crude processing in at least ten years for the week ended 21 September, according to Energy Information Administration (EIA) data.

Midcontinent light, sweet refineries running Bakken crude still enjoyed a stronger crack environment than most light, sweet refiners in other regions. But US Gulf coast refiners able to reach deeply discounted Midland-priced crude from the Permian fields of Texas and New Mexico would find the highest sweet crack spreads of the quarter. Andeavor, Delek, HollyFrontier and Phillips 66 all had access to Midland-priced crude during the quarter.

Higher prices for Brent-linked Atlantic basin crude during the quarter restored rail arbitrage to the Atlantic coast for Bakken production. But light, sweet margins for the coast remained the lowest of any region. West coast refiners including Andeavor, Valero and PBF faced below-average ANS-linked profit margins, with Los Angeles average prices superior to northern California.

Diesel drives late summer

Diesel cracks — the difference between diesel prices and benchmark crudes — exceeded gasoline margins in every region for the quarter, despite traditionally higher seasonal demand for gasoline during the period.

Average production of ultra-low sulfur diesel (ULSD) increased by 9pc from the same period last year to 5mn b/d, according to the EIA. Midcontinent ULSD output increased by 4pc over the same period, to 1.1mn b/d, and US Gulf coast refiners increased production by 13pc to 2.8mn b/d.

The industry approached the winter heating season and fourth quarter maintenance with national ULSD inventories higher by 3.8pc than year-ago levels and roughly flat to the five-year average. National days of ULSD supply — the balance of inventories versus demand — were 9pc lower than average for the period, at 34.4 days. Midcontinent ULSD inventories last week were 13.2pc higher than average, at 36.3mn bl. A warm winter or slowing industrial demand could cause those inventories to swell.

US independent refiners will begin reporting earnings the last week of October.