Wednesday, March 6, 2019

Falling gasoline crack spreads hit Gulf Coast refiners

U.S. Gulf Coast refineries saw gasoline crack spreads, a key marker for profitability, plummet in January as prices for heavy crude rose and gasoline inventories climbed.

U.S. Gulf Coast refineries saw gasoline crack spreads – a key marker for profitability – drop in late January to their lowest levels since 2014, the U.S. Energy Department said in a report issued Tuesday. The dip in margins came as gasoline inventories jumped and supplies of heavy crude tightened as OPEC slowed production and Venezuelan sanctions took effect.

The gasoline crack spread is the difference between the spot prices of gasoline and crude oil. The spread approximates the profit margin that an oil refinery can expect to make by "cracking" the long-chain hydrocarbons of crude oil into useful shorter-chain petroleum products.

On the Gulf Coast, gasoline crack spreads have steadily dropped since mid-2018 and briefly went negative in January and early February before rising, while distillate crack spreads remained relatively stable, the Energy Information Administration said.

Gulf Coast refineries usually benefit from some of the strongest crack spreads because they've spent decades upgrading their equipment to refine relatively lower cost heavy crude oil into gasoline or other valuable products.

But since December the price of medium and heavy crude oils with higher sulfur content have climbed relative to prices for light, sweet crude oil. The EIA said the price spike is likely because OPEC and Canadian producers reduced output just as the threat of production disruptions from Venezuela took effect. Those countries all produce medium and/or heavy crude grades with high sulfur content.

Beyond higher crude oil costs, U.S. high gasoline inventories have pushed down Gulf Coast crack spreads. The Gulf Coast – which has 34 percent of U.S. motor gasoline storage capacity – saw inventories hit an all-time high of nearly 91 million barrels in mid January. Gasoline inventories are also high outside the U.S., further adding to low gasoline crack spreads.

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