US refiners shake off tough winter

OREANDA-NEWS. April 28, 2016. US independent refiners have wrapped up a rough first quarter with bright prospects of peak summer driving demand ahead.

Maintenance and poor seasonal diesel profits will weigh on first quarter results for US independent refiners, but US drivers could deliver a record summer for the industry.

US gasoline consumption during the second and third quarters could exceed a 9.3mn b/d peak set in 2007, according to the Energy Information Administration (EIA). The record was once considered insurmountable as vehicle fuel efficiency improved and US driving behavior changed. But the lowest retail summer gasoline prices in 12 years and an improved economy should push consumption over the top, according to the EIA.

Gasoline margins have soared in anticipation of higher summer demand. The spread between outright gasoline and diesel prices this month widened to more than ten times the spread seen in April last year in the New York Harbor, averaging so far this week at 17.87?/USG. US Gulf coast Colonial was roughly five times higher than year-ago levels, at 23.05?/USG over the same period.

Conditions should favor coastal refiners able to capitalize on access to cheaper, sour crudes. Crack spreads trail year-ago levels, but simple 3-2-1 cracks for for sour crudes have held higher than sweet counterparts through the first four months of the year. Mars, a US Gulf coast benchmark, has in April averaged higher than Light Louisiana Sweet by 41pc, or \\$5.41/bl.

The turnaround should help refiners leave behind a first quarter marked by dismal diesel margins that helped lead Phillips 66, PBF Energy and Delta Air Lines subsidiary Monroe Energy to cut throughputs.

Crack spreads in every region trailed year-ago levels by at least 22pc, but midcontinent and northeast refining margins in particular suffered. Distillates-focused and Bakken-reliant Monroe Energy reported a \\$28mn loss at its 185,000 b/d Trainer, Pennsylvania, refinery during the first quarter.

But the spring shift to summer gasoline has had a rocky start. US Gulf coast gasoline production trails seasonal ten-year averages in April so far, according to EIA data. Planned and unplanned outages on fluid catalytic cracking (FCC) units have swamped the coast with vacuum gasoil.

A Gulf coast focus on exports could also leave midcontinent gasoline more vulnerable to disruptions. Prices soared in August during an unplanned outage at BP's 410,000 b/d refinery in Whiting, Indiana, and a cooling tower collapse at Phillips 66's 356,000 b/d Wood River joint venture refinery in Roxana, Illinois.

West coast disruptions continue to keep supply in that market uncertain. ExxonMobil has not yet begun startup work on gasoline equipment at its 155,000 b/d refinery in Torrance, California. PBF Energy has said that ExxonMobil must show stable operations at the refinery for more than 30 days before completing a June purchase of the refinery to demonstrate the facility's recovery from a February 2015 explosion.

Torrance can supply up to 20pc of southern California gasoline demand, and the outage roiled Carbob prices last summer. The plant's return should temper California refining margins and push out refined product imports this summer. But outage threats persist. The Santa Maria plant of Phillips 66's 120,000 b/d San Francisco refining complex continues to operate at reduced rates as the facility waits for Plains All American Line 931. And an upset in the Rodeo end of the same complex caused by a third-party hydrogen plant outage illustrates another threat to southern refiners.

Regulators continue to weigh how to manage the Aliso Canyon natural gas reservoir during a peak summer demand season following a four-month leak at the facility finally plugged in February.

Customers and managers of the resource have warned that disruptions to natural gas supply could interrupt power generation and feedstocks for hydrogen, a key ingredient to low-contaminant refined products demanded in the California market.