Strong global demand for refined products drives expansion
American motorists have enjoyed falling gasoline the prices the past few months, but changes coming in the petroleum refinery industry should change that in 2012.
U.S. retail gasoline prices have dropped an average of 25 cents per gallon during the last two months, despite continued high prices for crude oil and the recent closure of two petroleum refineries in Pennsylvania.
“Recent retail price declines for refined products don’t make any sense,” said Chris Paschall, Industrial Info’s VP of research for the Petroleum Refining Industry. “I’d advise motorists to get ready for potentially significant retail price increases in 2012.”
“Crude oil is still over $100 per barrel at a time when the U.S. economy is weak and global demand is high,” Paschall said. “What do you think will happen to crude oil and gasoline prices when the U.S. economy finally recovers? Looking forward, I see gasoline prices going up in 2012.”
Paschall noted that the global refining business is scheduled to bring about 2.9 million barrels per day (BBL/d) of new capacity online during 2012 and 2013. By contrast, petroleum refineries around the world added about 550,000 BBL/d of new capacity in 2011 and 2 million BBL/d in 2009-10.
To serve rapidly growing overseas demand, U.S. petroleum refineries sharply increased their export of refined products–mainly gasoline and diesel–during 2011, according to Paschall. Refiners began 2011 by exporting about 400,000 BBL/d of gasoline, but by late summer gasoline exports spiked to about 550,000 BBL/d.
“Global demand for refined products is growing, which is good. But because refiners are directing more of their product overseas, U.S. drivers end up paying more at the pump.”
The recent closure of two Pennsylvania petroleum refineries likely will contribute to upward price pressure at the pumps, Paschall said. The refineries that have closed are Marcus Hook, owned by Sunoco Incorporated (NYSE:SUN) (Philadelphia, Pennsylvania), and Trainer, owned by ConocoPhillips (NYSE:COP) (Houston, Texas).
Marcus Hook had a processing capacity of 85,000 barrels per day (BBL/d), while Trainer had a processing capacity of 185,000 BBL/d. Both refineries were more than a century old.
Sunoco also recently announced that deteriorating market conditions could force it to close a Philadelphia-area refinery by mid-2012.
For refiners, geography was destiny in 2011, Paschall observed. Midcontinent-based refiners saw healthy margins, while refiners in the Gulf Coast saw margins collapse. He said a lot of this divergence has to do with the crude oil market.
The petroleum hub in Cushing, Oklahoma, has limited out-bound capacity to the Gulf Coast, but an adequate out-bound capacity to refiners in the middle of the country. Midcontinent refiners price their crude oil off the West Texas Intermediate (WTI) benchmark, while refiners in the Gulf Coast price their crude oil off the Louisiana Light & Sweet (LLS) crude–basically, a U.S. proxy for Brent crude, which traded for nearly $8 per barrel more than WTI in late December.
“During 2011, we saw a huge divergence between WTI and Brent/LLS prices,” Paschall noted. “Outbound capacity constraints limited the amount of crude oil that could be transported from Cushing to the Gulf Coast. But we expect that to change in 2012 and 2013, as outbound pipeline projects connecting Cushing and the Gulf Coast come online. That should lead to lowered spreads in the Midcontinent and increased spreads in the Gulf Coast.”
The dynamics of the U.S. crude oil market pressured so-called crack spreads–the difference between crude oil input costs and refined product prices–for some refiners this year. Spreads fell to about $1 per barrel for refiners in the Gulf Coast, Paschall noted. But refiners in the Midcontinent market currently enjoy crack spreads of about $20 per barrel, down sharply from this summer, when they exceeded $30 per barrel.
Paschall observed that a number of refiners are expanding their ability to process heavier crude oils, which is a factor driving refiners’ project spending. “We’re seeing a lot more coker and hydrotreater projects than we have seen in previous years, as more refiners are processing more of the ‘bottom of the barrel’.”
Paschall also sees a healthy level of turnarounds and maintenance projects in 2012. “At this point, we’re tracking 215 U.S. refiner turnaround projects valued at $870 million for next spring, and another 130 projects valued at $461 million for next fall–both significant year-over-year increases from 2011 and the recent past,” said Paschall. “Some of this is driven by regulations, but some of it is also to meet overseas demand for refined products.”
Click the icon at right for a summary of U.S. refinery turnaround project spending.