North American independent refiners posted strong financial results in the second quarter, building on gains notched in the earlier three-month period. Major contributors to strong margins include growing discounts for local crude and stronger than usual diesel markets.
Continued supply growth in the Permian Basin and Western Canada, coupled with logistical bottlenecks in both areas, have lowered the price of feedstock crude oil. Growing volumes are overwhelming the capacity to move crude to the market on pipelines, as we discussed in this article. This has particularly benefited the inland refiners of the Midwest and mountain states, adding $5-10/barrel to reported gross margins relative to the same period a year earlier.
Overall US finished product demand was up 1.2% in April and May 2018 compared to the same months in 2017. Total product demand growth was propelled mostly by rising diesel demand, which was up 8.5% (over 300,000 barrels per day) in April and May 2018 compared to the previous year. Surging demand for diesel stems from increased trucking activity in response to commercial and industrial demand. Fortunately for refiners, strong diesel demand has more than offset lackluster demand for gasoline, which did not see its usual summer spike this year. We discuss this topic further in this recent blog post.
Strong demand was enough to push margins in coastal markets up $2-4/bbl compared to the previous year, even without the benefit from crude discounts. In the second quarter, cracking margins for light crude were higher by $2.30/bbl, while those margins for imported sour barrels rose $1.80/bbl compared to the year-earlier period. Cracking margins for heavy crudes improved by $4.80/bbl and coking margins for heavy crudes improved $5.60/bbl compared to the second quarter of 2017.
We expect this strong performance to continue through the end of the year. Continued growth in crude production in response to current high global crude prices should keep pipelines full and inland markets at a discount to the global market. Continued economic growth in the US and globally should keep product demand strong, especially for diesel and jet fuel.
However, the potential industry head winds we mentioned in our review of Q1 performance are still trends to watch as the rest of 2018 unfolds. These include:
- US hurricane season having potential impacts on crude and/or product markets, particularly in the Gulf Coast
- Potentially slower demand growth globally due to slower economic growth and/or a reaction to higher overall prices from tighter global crude markets
- Possible loss of export market volumes for the Gulf Coast if Mexico successfully restores a significant amount of refining capacity
- Growth in spare refining capacity globally with the start-up of significant new greenfield capacity in Asia and the Middle East
Tim Fitzgibbon is a senior industry expert based in Houston. We would like to thank Emily Billing for her contribution.