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Crack Spreads Widen as Refineries Close in the U.S. (01-02-2010)
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As refineries from New Jersey to New Mexico close at the fastest pace in three decades, traders in Singapore are profiting from a new plant on India’s west coast and a ship heading for Florida filled with jet fuel from Taiwan. The so-called refinery crack spread in Singapore, representing the value of fuels minus the cost of crude oil, may climb 50 percent to as much as $4.50 a barrel this year, according to a Bloomberg News survey of five analysts. U.S. refinery margins will drop 35 percent by December, futures contracts on the New York Mercantile Exchange show.
That means higher profits for oil companies and traders in Asia, where consumption is growing 13 times faster than in Europe and the U.S. That’s also why Morgan Stanley can buy jet fuel in Taiwan and ship it 11,500 miles to Port Everglades, Florida, and still make money.
“Fundamentally Asia is now at the center of the physical oil products business, and in a few years Singapore can emerge as a major paper-trading center” for derivatives contracts, not just physical oil cargoes, said Akira Kamiyama, a Tokyo-based trader at Mitsui & Co., Japan’s second-biggest commodity supplier.
Oil consumption in Asia will grow 3.3 percent this year, compared with 0.26 percent in Europe and the U.S., where no new refineries have been built since 1976, according to the International Energy Agency in Paris. North American refiners will leave about 25 percent of plants idle by 2014, the IEA forecast in June.
U.S. Decline
The estimates for rising refinery profits in Asia would mark the biggest jump since 2003, when rates increased 89 percent to $3.95 a barrel from a year earlier, according to Deutsche Bank AG. The Frankfurt-based bank recommends investors buy Reliance Industries Ltd., the biggest refiner in India, and China Petroleum & Chemical Corp., or Sinopec.
As energy demand improved in Asia, Reliance jumped 63 percent in the past year to 1046 rupees in Mumbai trading, while Sinopec advanced 49 percent to HK$6.13 in Hong Kong. Valero Energy Corp., the biggest independent U.S. refiner, tumbled 24 percent to $18.42 in New York.
Valero is suffering after the crack spread from processing three barrels of crude into two barrels of gasoline and one of heating oil tumbled 46 percent in the past year in New York trading. The refinery margin will decline another 29 percent to $5.31 for December delivery from $7.47 a barrel for March, futures contracts on the New York Mercantile Exchange show.
Traders, hedge funds and other non-commercial entities have cut their long positions on future and option contracts of gasoil crack spread swaps in the U.S. from a near two year-high of 12,811 as on Nov. 3 to 7,099 as on Jan. 26, according to data from the Commodity Futures Trading Commission.
Asia Growth
Refinery crack spreads fluctuate based on regional economic growth, fuel production and oil demand. China’s economy will expand 9.5 percent and India’s by 8 percent, outpacing the 2.7 percent growth in the U.S. and 1.2 percent in the Euro-region, according to forecasts compiled by Bloomberg.
Contracts in Singapore that reflect the return from breaking Dubai crude into diesel may climb to about $10.86 a barrel in the first quarter of 2011 from $7.85 in March, according to data by PVM Associates.
Reliance’s new Jamnagar refinery, on India’s west coast, and China started up about 800,000 barrels a day of capacity in 2009. Another 1.5 million barrels may come on stream this year, with a majority in the two countries, JPMorgan Chase & Co. said in a note to clients in December.
New refineries are the biggest risk to rising profits, as producers increase supply of gasoline and diesel fuel.
Surplus to Ease
“The surplus in global refinery capacity will ease slightly from 2009 but not enough to signal a sharp margin rebound,” said David Hurd, an analyst at Deutsche Bank in Hong Kong.
Mumbai-based Reliance operated its Jamnagar refinery complex, the world’s largest, at 96 percent of capacity in the first nine months of its fiscal year, representing 1.19 million barrels a day. China ran its refineries at about 83 percent capacity in December and processed record amounts of crude, according to government data.
Asian refiners are taking market share as decades-old plants are closed for good in the developed world. India more than doubled its exports of petroleum products to the U.S. last year after Reliance started its export refinery, according to tanker data from Clarkson Research Services Ltd. in London.
At least 610,000 metric tons of gasoline (5.19 million barrels) was shipped to the U.S. from India, enough to supply the country for about a half a day, Clarkson data show.
Jet-Fuel Cargo
Morgan Stanley is moving a cargo of jet fuel from Taiwan to Florida, according to two people familiar with the matter. The vessel Torm Carina passed through the Panama Canal on its 11,500-mile voyage and was heading for the Gulf of Mexico.
Royal Dutch Shell Plc of The Hague and San Antonio, Texas- based Valero led companies that shut 1.05 million barrels of daily capacity last year in North America and Europe, with another 1.32 million likely to close this year, Bank of America’s Merrill Lynch unit said in a Jan. 14 report.
Europe’s biggest refiner, Paris-based Total SA, is expected to announce today plans to end processing at its Flanders plant, which represents 137,000 barrels of capacity, or 7.2 percent of French crude consumption.
“In a Darwinian fashion, this materially aids margins for surviving refiners,” said James Schofield, an analyst at Bank of America Merrill Lynch in London.
The last time the refining industry contracted this much was the early 1980s, coinciding with four years of declining oil demand following crude’s surge after the Iranian Revolution.
Companies may need to close another 2 million barrels a day of capacity for refining margins to go back to the “golden era of the 2005-2008 average,” according to Soozhana Choi, head of commodities research in Asia at Deutsche Bank in Singapore.
Low Utilization
U.S. refineries are curtailing operations, preventing a glut and limiting losses. Refineries ran at 78.4 percent of capacity in the week ending Jan. 15, according to the U.S. Energy Department. That was the lowest level since at least 1989, excluding instances when hurricanes halted Gulf Coast operations.
Distillate inventories in the U.S. as on Jan. 22 are 16 percent higher than a five-year average even as the heating season comes to an end, according to the Energy Department.
“We expect the U.S., Europe and Japan to continue running at low utilization rates as demand is not picking up yet,” said Brynjar Erik Bustnes, an analyst at JPMorgan in Hong Kong. “This will leave the Asian refiners capable of maintaining a higher run rate and also enjoying slightly better margins.”
Saudi Arabian Oil Co., the world’s biggest crude producer, is exporting about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said in an interview in Davos, Switzerland.
“Asia is really the only one with all the economies pulling out of the recession and with industrial activity increasing,” said Vivek Mathur, an analyst focusing on Asian oil and petrochemicals at Energy Security Analysis Inc., a Wakefield, Massachusetts-based energy research firm. “The overarching view is that this increasing economic activity is bolstering crack spreads.”
Source: Bloomberg
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