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Last Updated: August 26, 2016
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Changing crude oil price differentials contribute to global convergence of refining profits

Refinery earnings were lower in second-quarter 2016 compared with the same time last year and are converging among different locations globally. Lower crack spreads (the price difference between crude oil and petroleum products) contributed to declining profits for some refiners compared with 2015. Also, North American refiners—which for years were consistently more profitablethan other refiners—were less profitable than European refiners for the second consecutive quarter. Changes in North American and European crude oil price differentials are likely contributing to the convergence in profits.

Recently released second-quarter statements from 27 companies show that 21 experienced a year-over-year decline in 2016 in refining profits, as measured by earnings per barrel processed. The decline in earnings was commensurate with the decline in crack spreads in the second quarter. In addition to changes in crack spreads, which serve as an indicator of refinery profits, earnings per barrel account for other costs, such as transportation costs and other operating expenses. Also, each refiner uses different crude oil blends and produces different yields of refined products, which will show differences among refiners in their per barrel earnings.

Analyzing the group of companies by primary refining region shows refinery earnings converging over the past year (Figure 1). The group of North American refiners consist of 14 companies with operations mainly in the United States and Canada, while seven companies constitute the European group and six the Global group, so-named because its companies’ operations are geographically diversified and affected by crude oil and petroleum product prices in many regions of the world. Companies in North America and Europe, on the other hand, may be more subject to differences in local markets.


One factor contributing to a convergence in refinery profits is an increase in the U.S. average refiner crude oil acquisition cost compared with global refiner acquisitions costs. Because crude oil and petroleum product prices are the two largest factors that affect a refiner’s profits, changes in the cost of crude oil acquisition can have a significant effect on profitability. North American refiners enjoyed a large discount to global crude oil prices for several years, measured by the difference between the U.S. composite refiner acquisition cost and North Sea Brent crude oil prices (Figure 2). With price discounts often in the double digits, North American refiners were consistently more profitable than global and European refiners, which on average paid higher prices for crude oil. Since the third quarter of 2015, the discount has not widened beyond $4.50 per barrel (b), reducing some U.S. refiners’ competitive advantage on costs.


Many of the factors that contributed to the wide spread were driven by rapid increases in U.S. and Canadian crude oil production that were not met with increases in infrastructure to allow the oil to be moved to refining centers inexpensively. Crude oil producers typically received a price lower than global prices for similar quality crude oils, giving some U.S. refiners a cost advantage. These factors began to reverse in 2014 and 2015. New pipeline infrastructure increased takeaway capacity to refining areas, such as the BridgeTex and Cactus pipelines in West Texas and Flanagan South in the Midwest. U.S. crude oil production declines, which began on a year-over-year basis in December 2015, also contributed to a comparatively tighter crude oil market in North America.

In the European market, refiners may be achieving increased efficiency through consolidating operations. The European companies in this analysis reduced distillation capacity 248,000 barrels per day in 2015, the fourth consecutive year of reductions. In addition, the crude oil market in Europe is comparatively looser than in North America, as Russian, Iranian, and Iraqi crude oil production has increased. Some refiners may be receiving lower costs for crude oil than other refiners as oil producers compete to maintain market share, which increases refinery profits. For example, the discount of Mediterranean Urals—a Russian crude oil many inland European refiners process—averaged greater than $2.00/b for most of 2016, which may have contributed to higher profits in recent quarters (Figure 3).


Crack spreads are lower in the third quarter and if the smaller spreads continue, it suggests third-quarter refinery profits will be lower globally. Absent meaningful changes in geographic crude oil and petroleum product price differentials, however, refinery profits will likely display smaller variability across different locations.

U.S. gasoline and diesel fuel prices increase

The U.S. average regular gasoline retail price was $2.19 per gallon on August 22, an increase of four cents from the previous week, but down 44 cents from the same time last year. The Midwest and East Coast prices each increased five cents to $2.17 per gallon and $2.13 per gallon, respectively. The West Coast price increased four cents to $2.57 per gallon, the Gulf Coast price rose three cents to $1.96 per gallon, and the Rocky Mountain price increased by two cents to $2.23 per gallon.

The U.S. average diesel fuel price rose six cents to $2.37 per gallon, down 19 cents from the same time last year. The Midwest and Gulf Coast prices each rose seven cents to $2.34 per gallon and $2.25 per gallon, respectively. The East Coast price rose five cents to $2.37 per gallon, while the West Coast and Rocky Mountain prices each increased four cents to $2.62 per gallon and $2.44 per gallon, respectively.

Propane inventories gain

U.S. propane stocks increased by 2.4 million barrels last week to 96.1 million barrels as of August 19, 2016, 0.4 million barrels (0.4%) higher than a year ago. Gulf Coast, East Coast, Midwest, and Rocky Mountain/West Coast inventories increased by 1.6 million barrels, 0.5 million barrels, 0.2 million barrels, and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 2.3% of total propane inventories.

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Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020
From Certain Doom To Cautious Optimism

A month ago, the world witnessed something never thought possible – negative oil prices. A perfect storm of events – the Covid-19 lockdowns, the resulting effect on demand, an ongoing oil supply glut, a worrying shortage of storage space and (crucially) the expiry of the NYMEX WTI benchmark contract for May, resulted in US crude oil prices falling as low as -US$37/b. Dragging other North American crude markers like Louisiana Light and Western Canadian Select along with it, the unique situation meant that crude sellers were paying buyers to take the crude off their hands before the May contract expired, or risk being stuck with crude and nowhere to store it. This was seen as an emblem of the dire circumstances the oil industry was in, and although prices did recover to a more normal US$10-15/b level after the benchmark contract switched over to June, there was immense worry that the situation would repeat itself.

Thankfully, it has not.

On May 19, trade in the NYMEX WTI contract for June delivery was retired and ticked over into a new benchmark for July delivery. Instead of a repeat of the meltdown, the WTI contract rose by US$1.53 to reach US$33.49/b, closing the gap with Brent that traded at US$35.75b. In the space of a month, US crude prices essentially swung up by US$70/b. What happened?

The first reason is that the market has learnt its lesson. The meltdown in April came because of an overleveraged market tempted by low crude oil prices in hope of selling those cargoes on later at a profit. That sort of strategic trading works fine in a normal situation, but against an abnormal situation of rapidly-shrinking storage space saw contract holders hold out until the last minute then frantically dumping their contracts to avoid having to take physical delivery. Bruised by this – and probably embarrassed as well – it seems the market has taken precautions to avoid a recurrence. Settling contracts early was one mechanism. Funds and institutions have also reduced their positions, diminishing the amount of contracts that need to be settled. The structural bottleneck that precipitated the crash was largely eliminated.

The second is that the US oil complex has adjusted itself quickly. Some 2 mmb/d of crude production has been (temporarily) idled, reducing supply. The gradual removal of lockdowns in some US states, despite medical advisories, has also recovered some demand. This week, crude draws in Cushing, Oklahoma rose for the second consecutive week, reaching a record figure of 5.6 million barrels. That increase in demand and the parallel easing of constrained storage space meant that last month’s panic was not repeated. The situation is also similar worldwide. With China now almost at full capacity again and lockdowns gradually removed in other parts of the world, the global crude marker Brent also rose to a 2-month high. The new OPEC+ supply deal seems to be working, especially with Saudi Arabia making an additional voluntary cut of 1 mmb/d. The oil world is now moving rapidly towards a new normal.

How long will this last? Assuming that the Covid-19 pandemic is contained by Q3 2020, then oil prices could conceivably return to their previous support level of US$50/b. That is a big assumption, however. The Covid-19 situation is still fragile, with major risks of additional waves. In China and South Korea, where the pandemic had largely been contained, recent detection of isolated new clusters prompted strict localised lockdowns. There is also worry that the US is jumping the gun in easing restrictions. In Russia and Brazil – countries where the advice to enforce strict lockdowns was ignored as early warning signs crept in – the number of cases and deaths is still rising rapidly. Brazil is a particular worry, as President Jair Bolosnaro is a Covid-19 skeptic and is still encouraging normal behaviour in spite of the accelerating health crisis there. On the flip side, crude output may not respond to the increase in demand as easily, as many clusters of Covid-19 outbreaks have been detected in key crude producing facilities worldwide. Despite this, some US shale producers have already restarted their rigs, spurred on by a need to service their high levels of debt. US pipeline giant Energy Transfer LP has already reported that many drillers in the Permian have resumed production, citing prices in the high-US$20/b level as sufficient to cover its costs.

The recovery is ongoing. But what is likely to happen is an erratic recovery, with intermittent bouts of mini-booms and mini-busts. Consultancy IHS Markit Energy Advisory envisions a choppy recovery with ‘stop-and-go rallies’ over 2020 – particularly in the winter flu season – heading towards a normalisation only in 2021. It predicts that the market will only recover to pre-Covid 19 levels in the second half of 2021, and a smooth path towards that only after a vaccine is developed and made available, which will be late 2020 at the earliest. The oil market has moved from certain doom to cautious optimism in the space of a month. But it will take far longer for the entire industry to regain its verve without any caveats.

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Demand recovery has underpinned a rally in oil prices, on hopes that the worst of the demand destruction is over
  • Chinese oil demand is back to the 13 mmb/d level, almost on par year-on-year
  • News that development of potential Covid-19 vaccines are reaching testing phase also cheered the market
  • The US active oil and gas rig count lost another 35 rigs to 339, down 648 sites y-o-y


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May, 23 2020
EIA expects record liquid fuels inventory builds in early 2020, followed by draws

quarterly global liquid fuels productionand consumption balance

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), May 2020

As mitigation efforts to contain the 2019 novel coronavirus disease (COVID-19) pandemic continue to lead to rapid declines in petroleum consumption around the world, the production of liquid fuels globally has changed more slowly, leading to record increases in the amount of crude oil and other petroleum liquids placed into storage in recent months. In its May Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global inventory builds will be largest in the first half of 2020. EIA estimates that inventory builds rose at a rate of 6.6 million barrels per day (b/d) in the first quarter and will increase by 11.5 million b/d in the second quarter because of widespread travel limitations and sharp reductions in economic activity.

After the first half of 2020, EIA expects global liquid fuels consumption to increase, leading to inventory draws for at least six consecutive quarters and ultimately putting upward pressure on crude oil prices that are currently at their lowest levels in 20 years.

As with the March and April STEO, EIA’s forecast reductions in global oil demand arise from three main drivers: lower economic growth, less air travel, and other declines in demand not captured by these two categories, largely related to reductions in travel because of stay-at-home orders. Based on incoming economic data and updated assessments of lockdowns and stay-at-home orders across dozens of countries, EIA has further lowered its forecasts for global oil demand in 2020 in the May STEO. The STEO is based on macroeconomic projections by Oxford Economics (for countries other than the United States) and by IHS Markit (for the United States).

changes in quarterly global petroleum liquids consumption

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), May 2020

In the May STEO, EIA forecasts global liquid fuels consumption will average 92.6 million b/d in 2020, down 8.1 million b/d from 2019. EIA forecasts both economic growth and global consumption of liquid fuels to increase in 2021 but remain lower than 2019 levels. Any lasting behavioral changes to patterns in transportation and other forms of oil consumption once COVID-19 mitigation efforts end, however, present considerable uncertainty to the increase in consumption of liquid fuels, even if gross domestic product (GDP) growth increases.

Members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) agreed to new production cuts in early April that will remain in place throughout the STEO forecast period ending in 2021. EIA assumes OPEC members will mostly adhere to announced cuts during the first two months of the agreement (May and June) and that production compliance will relax later in the forecast period as stated production cuts are reduced and global oil demand begins growing.

EIA forecasts OPEC crude oil production will fall to less than 24.1 million b/d in June, a 6.3 million b/d decline from April, when OPEC production increased following an inconclusive meeting in March. If OPEC production declines to less than 24.1 million b/d, it would be the group’s lowest level of production since March 1995. The forecast for June OPEC production does not account for the additional voluntary cuts announced by Saudi Arabia’s Energy Ministry on May 11.

EIA expects OPEC production will begin increasing in July 2020 in response to rising global oil demand and prices. From that point, EIA expects a gradual increase in OPEC crude oil production through the remainder of the forecast and for production to rise to an average of 28.5 million b/d during the second half of 2021.

changes in quarterly global petroleum liquids production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), May 2020

EIA forecasts the supply of non-OPEC petroleum and other liquid fuels will decline by 2.4 million b/d in 2020 compared with 2019. The steep decline reflects lower forecast oil prices in the second quarter as well as the newly implemented production cuts from non-OPEC participants in the OPEC+ agreement. EIA expects the largest non-OPEC production declines in 2020 to occur in Russia, the United States, and Canada.

May, 20 2020