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Oversupplied distillates market to weigh on US refiner profitability

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Hydrocarbon Engineering,

An oversupplied distillates market will continue to weigh on overall US refiner profitability, according to Fitch Ratings. The absence of winter heating demand has increased the importance of the driving season and gasoline margins to maintain refiner momentum in 2016.

Lack of winter heating oil demand has pushed distillate inventories above 160 million bbls as of early April versus historical averages of less than 130 million bbls, according to recent EIA data. With little incentive to produce additional distillates, some US refiners switched over early to gasoline, leading to an unseasonable build in gasoline inventories. As a result, gasoline stocks were moderately overbuilt but have since seen supportive draws. As of early April, they stood at 244 million bbls but were a more moderate 24.3 days of implied inventory when scaled against underlying demand.

Over the longer term, pressures remain on gasoline in the form of unfavourable environmental regulations, including rising renewable fuels mandates, higher mandatory fuel (CAFE) standards and greenhouse gas emissions regulations, although the recent skew in auto sales toward SUVs, crossovers and light trucks should help offset this somewhat.

Crack spreads contracted notably from last year's strong levels. Benchmark Gulf Coast 321 crack spreads in first quarter 2016 were about 40% below year-ago levels, averaging US$9.16/bbl versus US$15.37 in 2015. Mid-continent crack spreads were down a comparable level, while NYH 321 spreads fell a more moderate 21%, having experienced less of a run up in prior years. Key crude spreads have dropped sharply lower in line with lower oil prices, removing a windfall for mid-continent and other location advantaged refiners. This includes the Brent-WTI spread, which has averaged US$2.60/bbl versus a five year average of over US$11/bbl, and a WTI-WTS spread, which averaged just US$0.12/bbl versus a five year average of US$4.30/bbl).

Fitch is expecting to see a modest reflation in spreads as oil prices rise, although they are unlikely to return to levels seen over the past few years given that the crude export ban has been lifted.

Adapted from press release by Rosalie Starling

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