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Shrinking spreads put refiners at risk, Cowen says

  • Shrinking crude spreads - WTI has gained 7.2% while Brent has risen just 1.7% so far in December - likely will hold back refiners during the first six months of 2014, Cowen's Sam Margolin says.
  • Extremely favorable refining conditions from last month are deteriorating amid higher utilization and continued reduction in crude imports, limiting supply and causing U.S. prices to melt higher, the firm explains, adding that investors need to "manage near-term expectations" while "remain(ing) constructive on the refining story for 2014."
  • Margolin keeps Outperform ratings for Western Refining (WNR +4%), Marathon Petroleum (MPC +2.6%), Tesoro (TSO +0.4%), Valero (VLO +1.4%) and PBF Energy (PBF +1.7%); HollyFrontier (HFC +2.4%), Delek (DK +2.3%), Northern Tier (NTI +0.6%), Alon USA (ALJ +1.7%) and Calumet Specialty Products (CLMT +3.8%).
Comments (27)
  • Ruffdog
    , contributor
    Comments (1293) | Send Message
     
    "Shrinking crude spreads..." HFC is a central US refiner relaying mostly on WTI not Brent. A $12 spread is great for them! In Calif. the bay Area Tesoro gets its crude from overseas. Long HFC.
    20 Dec 2013, 03:34 PM Reply Like
  • scarman59
    , contributor
    Comments (23) | Send Message
     
    They meant to imply..."the crude spread is shrinking" as WTI price is gaining faster/larger than Brent, thereby reducing the spread. $12 spread is great...as long as it stays there! Long VLO
    20 Dec 2013, 04:54 PM Reply Like
  • Ed_o
    , contributor
    Comments (2) | Send Message
     
    NTI gets half their oil from Canada (WCS) and the rest from Bakken.
    So I think their profit margins are different than other refiners that buy at WTI prices, etc
    23 Dec 2013, 12:43 AM Reply Like
  • PalmDesertRat
    , contributor
    Comments (2646) | Send Message
     
    Why does nobody talk about the crack spread?
    20 Dec 2013, 03:43 PM Reply Like
  • RASTA
    , contributor
    Comments (50) | Send Message
     
    Good question!!!
    20 Dec 2013, 04:42 PM Reply Like
  • Blackworks Capital
    , contributor
    Comment (1) | Send Message
     
    I think it's because the WTI/Brent spread is going to be the primary driver of refiner profitability over the next few years. Most US refiners sell refined products on international markets and the international refinery market is tied to Brent. I think it's just easier to point to one number like the WTI/Brent spread as the indicator of what "should" be going on with the underlying crack spreads.
    20 Dec 2013, 04:54 PM Reply Like
  • omarbradley
    , contributor
    Comments (966) | Send Message
     
    is oil priced in dollars or pounds? seems to me as long as long WTI (which is true Texas Tea btw...top of line crude oil) is less than Brent it sure seems to me that oil is priced in pounds not dollars. Once WTI moves higher in price to the inferior product of Brent then that should have a dramatic impact on "market pricing" in the global monetary space. In other words I would want to start selling...massively...... and Euro's and start going long the currencies of market friendly energy giants. hmmm. that should include Russia...unfortunately it does not. It might include France interestingly enough...but they would have to exit the euro first and basically back their new Francs with the oil money from Total. I see that as beyond highly unlikely right now. Spain is another mind boggler to me. You let Argentina steal your oil business? I mean Argentina is a big piece of real estate...but it's not that big. stop harassing the English and pool your resources for a change. in the meantime the only two market friendly places on earth for oil (and all other commodities) that i see are the United States and Indonesia. If Qeubec became an independent country i would add them to the list as well.
    20 Dec 2013, 05:48 PM Reply Like
  • OUSAOU
    , contributor
    Comments (79) | Send Message
     
    absolutely not. There are two Brent the North Sea Brent and the CME Brent. The North Sea Brent price is set 30 days prior delivery and must be loaded on time or the price is attached to a penalty. The CME is the Middle East Brent which is set every day in Chicago. That is the Brent that is generally quoted internationally. It is set by traders that speculate.
    Aside from the west and east coast, the CME Brent is not the US reference any longer, the LLS is and the WTI price is adjusted for the demand on the GOM and the transport fee.
    The consensus is for the WTI to drop to low $80s in 2014-Q4. The production of WTI will provide an over supply, on the GOM, of 4MMb/d crude. No one as yet knows where this over supply will go. Several idea are on the table, the most intriguing is to export it to Canada! This would be in addition to Railbit and Dilbit diluent.
    21 Dec 2013, 09:16 PM Reply Like
  • jerrywengler
    , contributor
    Comments (413) | Send Message
     
    Does CLMT belong in the same category with other refiners when it has so many specialty products? I see that it can suffer from some of the same effects, but its total business would seem to give it less risk.
    20 Dec 2013, 04:21 PM Reply Like
  • RASTA
    , contributor
    Comments (50) | Send Message
     
    I agree-that is why CLMT will be "last man standing"!
    20 Dec 2013, 04:45 PM Reply Like
  • OUSAOU
    , contributor
    Comments (79) | Send Message
     
    There is two ways to analyses the refiner situation for 2014:
    1. The Crack Spread will be lower because: Less Brent will be imported in the GOM. Brent will still be imported on the West and East coast. The competition will be Bakken on both coast and ANS on the West Coast. The reference price will be LLS and WTI. By late 2014 the WTI will be approaching low $90 to high $80. The Crack Spread will suffer, and will be the pipeline transport saving.
    2. If the belief is that WTI will be flooding the GOM, discount has to be assumed. Many, if not all crude producer have production expenses that cannot be erase. Their profit margin will be under attack, the lower WTI price will reduce the profit margin substantially. If the Senator Baucus tax law passes, it has not as yet, producer will not be able to write off the annual drilling cost, but will have to spread it over 5 or more years. More capital will have to be found. This is not good for producers.
    Conclusion:
    The profit margin of producer may very well be less than the refiners Crack Spread. All this will be played out by the Q2-2014. Interesting times.
    20 Dec 2013, 04:31 PM Reply Like
  • Union Trade Assoc
    , contributor
    Comments (660) | Send Message
     
    Except WTI has been unexpectedly rising in price v/s Brent. The Producers are making more money per barrel.
    A refiner like VLO depends upon a lower price of WTI to increase it's margins spread between Brent which has not materialized into the 4th quarter & appears increasing likely through 2014. The N. Amer. Producers can make ample profits from WTI at even $ 85. per barrel.

     

    We'd look for N. Amer. E & P company profits to explode upwards, the refiners to fall.
    OPEC is maintaining a target price of minimally $ 100. per barrel oil making WTI vastly more profitable w increasing supply as well, the winner will be N. Amer. Energy Companies & increased independence for U.S. Consumers.
    22 Dec 2013, 01:33 AM Reply Like
  • OUSAOU
    , contributor
    Comments (79) | Send Message
     
    Not so, WTI is discounted versus the LLS. The Brent is not competitive on the GOM. West and East coast have a different situation. The Brent competes with the ANS because the differential margin is close. The ANS transport is by Jones vessel, therefore expensive. The Bakken R&R transport is competitive on the west and east coast.
    The oversupply of WTI on the GOM will be 4MMb/d by the end of 2014. The GOM over supply will move the bottle neck to Houston. The WTI will be discounted particularly in the inland refineries. This will be good for the refiners especially for the inland refiners. The producers with a WTI discounted will see the profit margin squeeze. Crude producers have fix production cost that cannot be stretched so less profit. This is especially true for the fracking producers. To keep a descent EUR they have to keep on drilling. The IP is the cash flow that pays the drilling.
    The producers will have a hard time to keep their profits up. The refiners will have a descent crack, but nothing like in early 2013. The inland refiners will see their crack based on the saving due to the transportation, plus a small WTI discount. In the past month the 3.2.1 crack is been between $4.60 and $13.27. We are far from the $30 crack. The WTS is in demand more so than WTI, this is the reason LLS price is high, it produces more diesel. Gasoline demand is down nationwide, so WTI will be discounted. As to why VLO is doing well, VLO has invested $3 billion in hydrocrackers in the Louisiana and Port Arthur refineries, to produce more diesel, which is exported. Not every refiner can absorb that kind of money and make a profit. ALDW will invest in hydrocracker so they can use WTI more efficiently.
    22 Dec 2013, 03:19 PM Reply Like
  • PalmDesertRat
    , contributor
    Comments (2646) | Send Message
     
    1. If Brent is at a premium to WTI, and less Brent will be imported to GOM, why would that cause a reduction in the crack spread? the mix is becoming more WTI and less Brent, so the average cost would decline, the crack spread should be higher,no?

     

    2. Why is it important that the producers' margins are lower than the refiners? they don't compete with each other,so as long as each stays in business to trade with the other, they shouldn't care what the other's profit margin is.
    20 Dec 2013, 04:41 PM Reply Like
  • TFCAB
    , contributor
    Comments (1956) | Send Message
     
    Palm Desert...here is my shot at answering....
    Refined product pricing is driven off the Brent pricing to world markets. Refiner cost inputs are driven primarily off of domestic supplies......refiners live or die on the spread between the two. It does not have anything to do w/ how much is imported etc.

     

    2. If producer margins are squeezed, there will be less incentive and more difficult to justify big CapEx to support new drill rigs and exploration. If supply growth moderates, WTI / domestic pricing will likely increase. If domestic pricing increases, the WTI / Brent spread will likely decrease and put more margin pressure on the refiners.

     

    FYI - Deutsche Bank thinks WTI goes to mid-low $70's by the end of 2014. They also see Saudi Arabia and OPEC defending $100 Brent pricing. If this scenario pans out. Refiners will be "printing money".

     

    IMO it will be hard to pass a tax that inhibits oil exploration / growth. I think Obama is to a certain extent on the ropes. He doesnt need the oil lobby on him and ads being run stating that the taxes will make prices go up because of his tax. Dont think the House of Rep's would pass it even if the Senate did.

     

    Also......Bullish option flows persist in the refiner names. I am long most of the refiners......

     

    hope this helps
    20 Dec 2013, 05:31 PM Reply Like
  • OUSAOU
    , contributor
    Comments (79) | Send Message
     
    The producers cannot lower the production expense. The price of WTI going lower, is a squeeze, therefore less profits. The refiners make their profit on the crack. Lower the WTI bigger the crack. Naturally the gasoline and the diesel go down as well. In 2014 the crack will most likely be the transportation cost saving for the inland refineries.
    21 Dec 2013, 09:23 PM Reply Like
  • ComputerBlue
    , contributor
    Comments (695) | Send Message
     
    One month we get the experts saying the refiners are benefiting from wider spreads and then a month or two later we get one that says the refiners are at risk due to contraction. Yawn.
    20 Dec 2013, 04:48 PM Reply Like
  • RMG
    , contributor
    Comments (85) | Send Message
     
    what is GOM?
    20 Dec 2013, 05:42 PM Reply Like
  • ComputerBlue
    , contributor
    Comments (695) | Send Message
     
    Gulf of Mexico
    20 Dec 2013, 06:10 PM Reply Like
  • William Eichler
    , contributor
    Comments (17) | Send Message
     
    CME for crude contracts Feb.2014 thru July average out for Brent at $110.77 and WTI at $98.02 for a spread of $12.68 or a discount of 11.5%.

     

    Fot the previous 9 weeks it has averaged, for Brent, at $108.04 and for WTI at $95.86. This makes for a spread of $12.30 or a discount of 11.4%.

     

    What is not to like with Holly Frontier - HFC ?
    21 Dec 2013, 12:49 AM Reply Like
  • bgold1955
    , contributor
    Comments (1984) | Send Message
     
    Stability in Middle East, if that ever happens, could reverse trend on refiners. Even perceived stability impacts refiner stocks such as August - early October of this year.
    21 Dec 2013, 11:38 AM Reply Like
  • Radio Joe
    , contributor
    Comments (3) | Send Message
     
    Shrinking WTI-Brent crude spreads may not mean as much to certain mid-west refiners such as CLMT and HFC who are strategically located and/or connected to their feedstock sources in the Bakken, Bow River or Eagle Ford where crude trades at significant discount to quoted WTI. Transportation costs will continue to abate with new pipeline connections directly to their cheap crude source (e.g., TexStar pipeline startup for CLMT by year-end 2014). Declining RIN prices for Q4 2013 and next year will also give a welcome boost to the bottom line.
    21 Dec 2013, 12:04 PM Reply Like
  • Radio Joe
    , contributor
    Comments (3) | Send Message
     
    For some midwest refiners (e.g. HFC, CLMT,etc.), what's really important is not so much the WTI-Brent spread as their ability to source their crude oil feedstock directly from cost advantaged sources such as the Bakken, Eagle Ford, Bow River, etc. - all of which sell at a significant discount to quoted WTI prices. Refinery locations close to the producing wells and new connecting pipelines also contibute in no small way to lowering of transportation costs and a more favorable "crack spread ". Don't worry so much about the lowering WTI-Brent spread.
    21 Dec 2013, 12:09 PM Reply Like
  • AllStreets
    , contributor
    Comments (1031) | Send Message
     
    I think NTI is almost entirely a play on the crack spread using Bakken-type pricing and has little or nothing to do with Brent/WTI. They sell most refined products regionally, not internationally. If we assume crude will generally go down (or not up) in price, the question is what becomes of gasoline and diesel pricing. I'd guess not down on a national scale, probably up, because other refiners will be selling all they can refine and selling as much as possible into foreign markets to take advantage of high/higher Brent/WTI. US refiners are virtually at capacity already so lower product prices highly unlikely. I don't see how the crack spread can shrink for NTI in 2014 and will likely grow. Long NTI with hedge.
    22 Dec 2013, 11:41 AM Reply Like
  • PalmDesertRat
    , contributor
    Comments (2646) | Send Message
     
    How can you be long with a hedge? A hedge offsets the position so net net you would be flat.

     

    I assume you're long with some downside protection, such as long a put.
    22 Dec 2013, 12:00 PM Reply Like
  • Ed_o
    , contributor
    Comments (2) | Send Message
     
    NTI gets oil from Canada and Bakken.

     

    Different spreads than WTI & Brent, etc.
    23 Dec 2013, 12:11 AM Reply Like
  • Blue22
    , contributor
    Comments (141) | Send Message
     
    Why should refiners be at the mercy of Brent crude spreads or any other price manipulation outside the US? We've got the supply and most of the demand is coming from the international markets and not to WTI. That oversimplifies the problem, but for refiners to continue taking massive hits over bogus markets is crazy!

     

    If the US wants to beat up the oil and gas companies every chance they get, restrict the Federal fuel supplies and charge them penalties equal to the damages from regulations. Do it as an industry! Oh yeah! Throw out Venezuela and the other two-bit sycophants!
    23 Dec 2013, 03:37 PM Reply Like
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