Monday, January 24, 2011

ANALYSIS: Midwest WTI cracking margin rises as contango widens

US refining margins jumped last week in both the Gulf Coast and the Midwest, but while product price strength was primarily fueling Gulf gains, the Midwest gains were driven largely by a widening WTI crude contango.

The Midwest WTI cracking margin -- based on Platts spot crude and product prices, and Turner, Mason and Co. refining yield formulas -- rose to $11.41/b on January 21 from $7.03/b on January 18. The WTI cracking margin averaged at $8.49/b the week ending January 21, up from $7.27/b the week ended January 14.

In the Gulf, the Light Louisiana Sweet cracking margin averaged at $8.34/b last week, up from the prior week's $7.35/b, after climbing to $9.22/b on January 21.

But the two regions tell two different stories. Platts' margins are computed by subtracting a crude's spot price from its netback. A crude's netback value is determined by applying Platts' refined product assessments and transportation rates to that crude's yield formula.

The netbacks for both WTI and LLS have gained in recent weeks, reflecting stronger product prices in the Midwest and the US Gulf Coast. For instance, the Gulf LLS cracking netback ended last week at $106.55/b, up from $102.63/b on January 2. The Midwest WTI cracking netback climbed to $99.39/b from $96.73/b over the same period.

But the front-month spot WTI price ended last week almost $10/b under the front-month LLS price, reflecting the abundance of barrels stored at the Cushing, Oklahoma, delivery point.

And the LLS margin in the Midwest is much lower than the WTI margin. While the LLS cracking margin basis Cushing climbed to $5.03/b on January 21 from $2.93/b on January 18, it was more than $6/b below the WTI cracking margin, despite a higher netback for LLS.

That price spreads against WTI crude are being impacted by storage dynamics at Cushing is nothing new -- although most of the attention has focused on the WTI/Brent spread blowout. Cushing stocks have grown, as has capacity, causing the WTI contango to widen. The February/March spot WTI spread was assessed at minus $1.20/b on January 21, out from minus 92 cents/b on January 18.

Critics have correctly noted the comparative lack of spread volatility in the Brent intra-month spreads, and in Brent-linked crudes. While LLS traded at a record high $11.10/b over WTI Monday, such spreads are rarely if ever seen in Brent-linked North Sea and West African crudes.

But while the price of Brent is influenced by loadings and offshore storage in the North Sea, it is not, like WTI, a market driven by a large volume of onshore storage.

Volatile price spreads are not uncommon in the pipeline- and storage-centered US market, and are not exclusive to WTI. In mid-January, for instance, apportionments on the Enbridge pipeline system, which delivers crude to the US from Canada, caused Western Canadian Select price differentials to weaken dramatically.

WCS fell to $30.50/b under the WTI swap on January 14, from $19.50/b under on January 3, as barrels built up at the Hardisty, Alberta, pricing point. WCS has since rebounded to $21/b under the WTI swap.

--Jeff Mower,

Similar stories appear in Oilgram Price Report See more information at

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