capSpire Blog

Limited takeaway capacity in the Permian and the widening of the WCS-WTI spread are benefiting some independent refiners. (The Permian Basin crude hub is located in Midland, where prices are benchmarked against the WTI Cushing price [Mid-cush spread]. Canadian crude from the prolific oil sands is called the West Canadian Select, and it is settled in Hardisty, Alberta. Canadian crude is also benchmarked against the WTI Cushing price [WTI-WCS]). Both the Permian and Canadian oil sands face the same problem of having more production than there is pipeline capacity. As a result, excess supply has pushed prices down in these regional hubs.

The graph below illustrates how the share prices of a group of independent refiners have diverged since mid-February when expectations about the increasing Mid-Cush price spread started to gather momentum. The trend for all the refiners listed in the graph is upward but to different extents depending on their relative exposure to the WCS-WTI spread and the Mid-Cush differential. Delek and Hollyfrontier have outperformed their larger contemporaries because of their exclusive reliance on domestic crude.

Generally, the physical location of a refinery determines its exposure to a particular price for the crude that it consumes. In the U.S, most coastal refineries are exposed to the Brent price, whereas inland refineries are more exposed to differentials to the WTI price. This is because coastal refineries are primarily fed by waterborne crude that is priced at the international Brent price. Inland refiners tend to source more crude from domestic production, which is based on the WTI price.

Today, the WTI-Brent spread is sitting at -$5.00, and futures contracts suggest that this will continue for the foreseeable future. The Mid-Cush spread is hovering at around -$15.00, and the market consensus suggests that it will remain at this level until mid-2019. Meanwhile, the WCS-WTI spread is steady at -$25, with no end in sight.

So what does all this mean?

Depending on their locations, U.S refiners pay very different prices for their crude supply. As such, independent refiners with a large proportion of their crude priced at the Midland and WCS discounts benefit from cheap feedstocks, which is reflected in their share prices. Delek and Hollyfrontier stock prices doubled between February and June this year because of their strategic locations close to Midland and exposure to WCS.

While this trend is set to continue for the next year or two, the only constant in the oil business is change. Andeavor, Phillips 66, Plains, Energy Transfer, and Epic are all planning new takeaway capacity from the Permian, so current market conditions will not last long.

Furthermore, many mid-continent refiners who postponed spring turnarounds to capture the benefits of the cheap feedstocks are now reaching their limits and will be forced into turnarounds this fall. As such, forward-looking refining companies can use this short-term fortune as an opportunity to future-proof their supply chains by investing in technology that will ensure they are well positioned to deal with whatever the future holds.  

On Thursday, September 6, at 11:00 am CDT, capSpire and Genscape will expand on this topic in a webinar titled, Refinery utilization outlook and crude supply optimization. Genscape will assess how wide differentials in the Permian Basin impact refinery turnarounds and will compare fall 2017 to fall 2018 turnarounds. capSpire will present our game-changing lease crude optimization (LCO) software to illustrate how first purchasers can use technology to increase profit margins.

To register for the webinar, please click here.