The Importance of Crude Oil Differentials for Refiners

abarrelfullabarrelfull wrote on 27 Apr 2011 08:24

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What many outside the industry don't really understand is the vast differences in quality between different types of crude. Refineries cannot refine any crude that they wish, but must choose crudes that are compatible with their refining assets.

This creates problems and opportunities for refiners when disruptions to supplies of specific crudes significantly impact crude oil price differentials.

As an example, Valero is more than happy with its 1st quarter results.

first quarter 2011 operating income was $786 million and refining throughput margin was $9.91 per barrel. The $782 million improvement in operating income versus first quarter 2010 was mainly due to a $3.93-per-barrel increase in refining throughput margins.

The reason:

The increase in throughput margins was primarily due to higher margins for diesel and jet fuel plus wider discounts for heavy-sour feedstocks on the Gulf Coast and light-sweet crude oils in the Mid-Continent.

Note that Valero is getting better prices on both its light crude and its heavy. The reason? The heavy crude that Valero buys is indexed to WTI prices, which are depressed by the physical restrictions of Cushing. The light crude is cheap for the same reason.

In the Mediterranean, there are those who rather than celebrating are under pressure.

Nine weeks of civil conflict in Libya is crimping supply of lower-sulfur “sweet” crude, which is more easily refined into cleaner-burning fuels, pushing up prices for comparable grades from the North Sea and Nigeria faster than “sour,” high-sulfur blends from Saudi Arabia and Russia. That helps Finland’s Neste Oil Oyj, Hungary’s Mol Nryt. and refiners set up to turn sour crude into fuel for cars or jets, while hurting Mediterranean refiners such as Saras SpA and Hellenic Petroleum SA that can’t easily switch away from low-sulfur grades.

Hellenic is working on correcting this with its Elefsina Refinery Project which is expected to be finished later this year.

A good understanding of what type of crude oil a refinery uses can help assess what impacts changes in crude oil supply can have.

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