In the Nov. 13 Graph of the Week, we highlighted factors driving the upsurge in US exports of finished petroleum products–a durable trend that should fuel earnings growth for refiners with capacity on the US Gulf Coast and names that own export facilities in this region.
This bullish outlook differs dramatically from the plight of European refiners, which have suffered from steadily declining domestic demand (a long-term headwind exacerbated by the Continent’s weak economy) and intensifying competition from a new generation of Asian refineries and feedstock-advantaged US operators.
This graph comparing the 3-2-1 crack spreads for EU refineries running Brent crude oil and their US counterparts processing West Texas Intermediate (WTI) and Light Louisiana Sweet (LLS) demonstrates the widening profitability gap between the two regions.
Source: Bloomberg, Energy & Income Advisor
The 3-2-1 crack spread approximates the margin earned by refining three barrels of crude oil into two barrels of gasoline and one barrel of distillate (heating oil or diesel). (For more details on how to calculate this metric, see Refiners: Profiting from America’s Oil Boom.)
Access to inexpensive supplies of domestically produced light-sweet crude oil has enabled profit margins for well-positioned US refiners to dwarf those of their counterparts in Europe.
And as we noted in Crude Realities: Price Volatility is Here to Stay, the recent influx of formerly landlocked crude oil to the Gulf Coast has decoupled the price of LLS from Brent, extending the feedstock advantage to the region’s refineries.
EU refiners’ woes are underscored by a capacity utilization rate that’s come in at less than 80 percent for six consecutive quarters.
Run rates in this range further constrain profitability, suggesting that additional shutdowns could be in the offing; downstream operators last year shuttered about 7 percent of the Continent’s refinery capacity.
We would expect any forthcoming closures to involve refineries that formerly exported a significant amount of their production across the Atlantic.
Elliott and Roger on Feb. 26, 2019
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