Refining Market Update
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Issue 4 - 2010 Refining Market Update

There were contrasting trends in returns to high conversion refineries in April with margins in the US Gulf (measured against WTI as the regional crude benchmark) rising by around US$1.50/bbl, while those in NW Europe (versus dated Brent) and Singapore (versus Dubai) fell by a similar amount.
  • The fallback in margins in Europe and Asia was due to some weakening in formerly strong cracks for light ends. In NW Europe, the monthly average gasoline crack spread slipped from US$14/bbl in March to US$11/bbl in April with a corresponding drop at Singapore from around US$13.50/bbl to US$10.50/bbl for 95 octane material.
     
  • However, cracks for middle distillates were slightly stronger, month-on-month, in both Europe and Asia. This was in sharp contrast to lower fuel oil cracks especially for high sulphur material with 180 cst at Singapore slipping from minus US$4.50/bbl in March to minus US$7.25/bbl in April.
     
  • Due to the arrival in Asia of large arbitrage volumes from the West, the weaker trend in fuel oil contributed to the fall in margins for simple refining in April for both hydroskimming at Singapore and basic conversion in NW Europe (see chart right). Indeed, the negative return at Singapore means that ‘hydroskimming only’ now seldom sets the economics of refining the marginal barrel in Asia.
     
  • Though global refinery margins in April were typically lower than in March, they continued to receive strong support from widespread seasonal maintenance in Europe and Asia. This support will continue into May, which should underpin margins in Europe and especially Singapore at levels close to those seen in April. Thereafter, however, given the surplus in global refining capacity, as units come back on stream from maintenance it is difficult to envisage anything other than a gradual decline in margins through June and July.
     
  • The excess stocks position at Cushing should begin to correct as local refineries come back on stream from maintenance. Nevertheless, there is likely to be a deep WTI/dated Brent inversion during May which will continue to give a misleading impression of strong US margins. Indeed, LLS in the US Gulf is currently trading at a premium to land-locked WTI of more than US$5/bbl compared to a more normal level of around US$1/bbl. This suggests that WTI margins are as much as US$4/bbl above the more typical level of returns to US Gulf refiners from processing internationally traded crudes.