By Jorge Pradilla, FUELSNews Editor
In parts one and two, we reviewed what the factors that have contributed to the fluctuation in diesel prices over time, starting with the consumer price movement before closely analyzing crude oil trends. On part three, I want to focus on refiner margins (keep in mind that there are other factors that affect street prices, such as taxes and retail margins). So we know that refineries make money on the spread between inbound costs (crude) and outbound production (gas, diesel, ect.). Illustrated below, the crack spread, the profit margin for oil refineries when they compare the cost of the crude oil (inputs) to refined products wholesale prices (outputs), has been relatively volatile over the given time period. As seen on the chart, the typical U.S. refinery is averaging $47 per barrel by turning Western Canadian Select (WCS) crude into refined products during 2013, followed by WTI’s $25 per barrel and Brent’s $15 per barrel.
As seen on the chart below, the heating oil (HO) front month futures contract price lost $.1685 per gallon in September, settling at $2.9710 per gallon. The Heating Oil vs. WTI crude crack spread decreased 4 cents during September, settling at $0.54 per gallon on September 30th, while the HO vs. Brent crack spread fell by a penny to $0.40, and the HO vs. Western Canadian Crude (WCS) crack spread increased by 16 cents to $1.31.
So what affected the heat crack spreads?
Well, a few things. Heating oil futures prices plummeted in September, dropping almost 17 cents per gallon (cpg) between August 30th and September 30th. Crude oil prices dropped as well, though only 13 cpg during the same time period. In other words, regardless of the reason for the drop, the heating oil and crude movements were not 100% correlated, which translated into narrower refiner margins. According to the EIA, another big factor over the summer was the higher distillates demand levels. In fact, taking the four week average of distillate consumption and exports combined, July demand came in at 4.92 million barrels per day (bbl/d), an 6.5% increase in comparison to a five-year high of 4.6 million bbl/d for the month, while August distillate consumption and exports totaled 4.88 million bbl/d, an increase in of 1% comparison to the five-year high. Though the official demand data for September is not available yet, higher demand in July and August translated into higher distillate prices, and for those refineries taking WCS crude, it meant extremely profitable margins. Lastly, distillate inventories also affected the heat crack spread during Q3, as they reached five-year lows, which ultimately influenced heating oil prices.
Jorge Pradilla is the head editor of FUELSNews 360°, and authors the FUELSNews daily e-newsletter. Born in Bogota, Colombia, Jorge holds a BS in Marketing from Piedmont College and an MBA in Managerial Leadership. Jorge Pradilla currently holds the position of Supply Risk Supervisor at Mansfield Oil Company, focusing on the company’s hedging portfolio, overseeing the contract reconciliation processes and conducting market analytic efforts.