The En-Pro Blog

If the oil companies are making healthy margins on gasoline despite flat demand, it begs the question, why are they reducing refinery runs?

We think it’s because they are looking at the current diesel margins (crack spreads), low demand, and huge inventories both on land and off shore.

If this is all in place come the heating season, then if they think margins are low now, wait until October.

But that’s a simplistic overview. Let’s get to the root of the refining industry’s problem.

Most refineries on the Gulf Coast have retooled to allow them to refine heavy sour crude (SC) as opposed to the light, sweet WTI crude (SW). The incentive for the change was that SC was sold at a discount to SW. For example, from 1999 to 2009 the spread between the Mexican SC and the SW averaged $10/bbl with a high of $16/bbl in 2008.

This spread has slipped to $4/bbl in Q1 2009 and in fact in the first week in June 2009 the spread was negative with SC being higher than SW. In an effort to increase the spread, some refiners shut down cokers and hydrocrackers. The reason for the reduction in the spread is that when OPEC announced their production cut last December, most of this was in the form of SC.

So what are the reasons for the reductions in refinery runs and what does it mean for the rest of the driving season – and – what will be the refining industry’s last resort? Find out in the latest Energy Report. Sign up by sending us your email to: info@en-pro.com.

By: Roger McKnight, Senior Petroleum Advisor