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US Gulf oil slips as low margins cut refinery rates

07.25.2014  | 

Gulf Coast crude weakened the most in six months versus global prices after a rally this month amid record demand from refiners put pressure on fuel margins.



Gulf Coast crude weakened the most in six months versus global prices after a rally this month amid record demand from refiners put pressure on fuel margins.

Light Louisiana Sweet for August delivery weakened by $2.86/bbl  to a premium of $1.66 versus European Dated Brent, according to data compiled by Bloomberg. August delivery will stop trading on July 25. The premium versus US benchmark West Texas Intermediate sank $2.45 to $1.3/bbl. September LLS was valued at about $3.35 over WTI, according to broker PVM.

The 3-2-1 crack spread on the Gulf Coast, a rough estimate of the profit from turning LLS into gasoline and diesel, fell to $1.17/bbl on July 23, the lowest since December 2012. It rebounded to $4.74 on July 24.

“We expect further weakness in LLS,” Amrita Sen, the chief oil market analyst for Energy Aspects in London, said by phone. “The only way to balance the US system is for crude prices to fall until you incentivize refinery runs again.”

The drop followed a rapid run-up in Gulf Coast prices as refineries two weeks ago processed the most crude since at least 1992. LLS jumped from a $1.49/bbl discount to Brent on July 15 to a $4.52 premium on July 23, the highest level since July 22, 2013.

The jump in prices is drawing more crude cargoes to the Gulf Coast, including at least four tankers from West Africa since July 16, according to lists of charters compiled by Bloomberg. Prior to that there hadn’t been a booking reported since July 3.

Cargo Imports

Weak Brent prices and high refinery runs in the US had made it economic to ship some distressed Atlantic cargoes to Gulf Coast refineries, Vienna-based JBC Energy said in a July 21 research note.

“We are now beginning to see some opportunities for prompt trans-Atlantic arb something that has been exceedingly rare in the shale boom era,” JBC said.

An average of 890,000 metric tons is set to load in the four weeks including the week of July 27, the most in two months, according to data compiled by Bloomberg.

Gulf Coast refiners processed 8.62 million bpd during the week ended July 18, near the record 8.65 million two weeks before.

The amount of crude in storage in the Gulf Coast divided by refinery runs, a measure of how well-supplied the market is, fell to 23 days last week, the lowest level since February.

LLS is a low-sulfur, or sweet, crude of similar quality to West Texas Intermediate, the US benchmark priced in Cushing, Oklahoma, and Brent, which most waterborne oil is priced against.

Historical Premium

From 1983 to 2011, LLS averaged an annual premium of 88 cents to $4.80/bbl over Brent, as refineries on the Gulf Coast depended on foreign oil.

The US shale boom, which increased crude production 63% in the past five years, has brought more domestic oil to the Gulf Coast, eliminating the need for most light, low-sulfur crude imports. LLS sank to an all-time low $16.58 discount versus Brent on Nov. 27.

The recent shift to a premium caught many by surprise, Andrew Lebow, senior vice president at Jefferies Bache in New York, said by phone.

“Incredibly, sweet looks like it’s tight, which would be completely the opposite of market expectations,” he said. “We always thought the next sweet barrel would be easily available.”

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