Profit-Taking Tuesday: Refined Products Back Away From Two-Month Highs

Refined products are seeing a modest pullback to start Tuesday’s trading, after setting fresh 2 month highs overnight. The move so far looks like a round of profit taking after a strong 3 week rally, and perhaps some unwinding of long spread positions now that the French protests don’t appear to be having a sustained impact on refinery operations. 

Refining margins have seen big gains ever since prices bottomed out in early December, and Gulf Coast 5/3/2 crack spreads (which imply a ratio of 3 gallons of gasoline and 2 gallons of diesel produced for each 5 gallons of crude processed) once again approaching $1/gallon.  The other piece of good news for refiners is that these margins are happening while natural gas prices are trading at their lowest levels in 2 years, so their input costs are substantially lower, and should help drive another bumper quarter for those who are operating.

Of course, it’s those refineries that aren’t operating that are a big contributor to the increase in margins, with numerous facilities still struggling to resume full operations since the Christmas Blizzard impacted almost every plant east of the Rockies.  The Suncor facility outside Denver remains the largest casualty of that storm and continues to have ripple effects for at least 8 surrounding states. That plant is by no means the only one still struggling with the fallout of unplanned shutdowns, which is why US refinery throughput went from above average to below in the past month.

In addition to the weather-related issues, the normal day to day risks of operating refineries are still apparent as at least three facilities have been forced to shut units in the past few days due to operational upsets and fires. The PBF refinery near New Orleans that caught fire this weekend is reported by ENT to need at least a month to repair the affected units, while the Marathon facility near LA also has multiple units offline following a fire Monday. The P66 refinery in San Francisco, which is scheduled to convert to controversial RD production next year, was also said to have units knocked offline which helped bay area basis values jump on Monday.

Natural gas prices are seeing a rebound off of their multi-year lows this week as colder weather is forecast for much of the country over the coming 2 weeks, and the Freeport LNG export facility is reporting it’s ready to resume shipments once it receives regulatory approval. 

The much warmer-than-expected winter weather through most of December and January has been a literal life saver for European nations that didn’t have an answer for how they’d heat their homes this winter and has alleviated much of the concerns about yet another distillate supply crunch along the East Coast. The next two weeks will be particularly critical if a cold snap does hit, just in time for the Russian embargo on distillates to begin. 

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