Viewpoint: US refiners look abroad in 2016

OREANDA-NEWS. December 25, 2015. US refiners will lose their inward focus in 2016 as changes to federal policy return the industry's attention to waterborne supply.

Low energy prices have rekindled US product demand and revived refiners that teetered on the brink of closure before the shale boom upended the North American oil business. US refiners will continue to build their own export businesses to help maintain high processing rates. But increasingly difficult environmental mandates and new opportunities for crude arbitrage will force new jostling among major refining regions in 2016.

An easing of 40 years of restrictions on exports of US crude will soothe swooning light crude prices that rewarded well-positioned refiners over the past five years. US crude access to foreign markets will keep domestic benchmarks much closer to global prices. Nymex West Texas Intermediate (WTI) has settled at parity or premiums to Ice Brent for deliveries into May since 18 December, when President Barack Obama signed the end of the export ban into law.

The tighter WTI-Brent spreadhas eroded lucrative discounts for stranded US crude and turned refiner attention to waterborne crude imports. Conditions have also restored sour crude margins that had faded at the height of US light, sweet production.

The 2016 landscape will look familiar to east coast refiners who survived almost 450,000 b/d of regional capacity shut-ins between 2010 and 2013.

Falling crude prices erased arbitrage for the railed Bakken lifeline that inspired terminal construction and helped rekindle east coast profits. Regulations increasing shipping costs between US ports could make waterborne US Gulf coast crude more economic in Europe than Pennsylvania.

"Certainly, if you are completely reliant on light shale crude on the east coast, you have a bit of an issue, because it's landing at a pretty big number," PBF Energy chief executive Tom Nimbley said in late October. Arbitrage to the coast has continued to erode.

East coast refiners can pin some hope on a key difference from their worst years. A global war for market share has meanwhile slashed prices for the light, sweet feedstocks upon which almost every east coast refiner depends.

US Gulf coast refiners flooding the region with cheaper refined products in 2013 have turned their attention abroad as their cheapest access to the New York Harbor shows little appetite to expand. But the region could face new pressure from another flank.

Midcontinent refiners will keep a transportation advantage through their position at the top of the pipelines for Canadian and high quality US crude. The same inland footprint traps production from this higher output. Refiners have crept into traditional Gulf coast markets, including Arkansas and north Texas, since 2013. New projects from Buckeye Partners and Sunoco Logistics last year increased midcontinent refiner access to western Pennsylvania.

Marathon Petroleum, with its central refining footprint, growing east coast retail presence and newly-acquired NGL business seeking outlets near Philadelphia, sees room for more. The company is considering a standalone eastern midcontinent alkylation plant as part of a strategy to supply the New York Harbor.

"We have already gone a great deal into the western Pennsylvania, Pittsburgh, market," Marathon Petroleum chief executive Gary Heminger said earlier this month. "You'll see us, eventually, going further."

West coast refiners must brace for the return of the 155,000 b/d refinery in Torrance, California, as well as the expected arrival of its new owner, PBF Energy. A February explosion at the refinery tightened supplies of California's boutique gasoline blendstock and set off a year of high premiums for the fuel.

Restoration of the refinery, expected by March, should cool supply constraints that delivered a profitable 2015 for refiners able to maintain production in the largest and most highly regulated US market.