One Refiner MLP Ready to Go
North American refiners are in the catbird seat as unconventional energy discoveries expand in the US and Canada observes Elliott Gue of Energy and Income Advisor.
Widening differentials between inland oil prices in the US and global oil benchmarks have driven the refining industry's second Golden Age. In short, the most recent up cycle isn't a global phenomenon, but applies primarily to a handful of advantaged regions in the North American market.
The 3-2-1 crack spread assumes that a refiner purchases WTI crude oil as feedstock and sells gasoline and heating oil. As we explained in Mind the Differentials, rapid production growth in the Bakken Shale and other unconventional oil fields has overwhelmed takeaway capacity at the hub in Cushing, Oklahoma, the delivery point for WTI.
Refiners with facilities in the Midwest can purchase WTI at favorable prices and sell their output at prices that reflect global supply and demand conditions. On the other hand, refineries on the West Coast or the Gulf Coast lack sufficient access to WTI, forcing them to run Brent or Light Louisiana Sweet crude oil-higher-priced waterborne varietals that constrain profitability relative to their inland peers.
In 2011, more than 16.5 million barrels of refined products-equivalent to almost one-fifth of global demand-traded across international borders. Because gasoline and distillates are globally traded commodities, the prices of these products usually track Brent crude oil, a key international benchmark.
That's great news for inland refiners in North American that can purchase WTI crude oil at a local discount and sell gasoline and diesel fuel at prices that reflect global supply and demand conditions.
Regional refining margins historically have moved in lockstep throughout the world.