U.S. Refiners Feel the Squeeze as Crude Oil Discount Disappears

Loss of cheap shale crude has removed a key advantage vs. overseas rivals

East Coast refineries, like the one above owned by Philadelphia Energy Solutions, have been hurt by the loss of access to exceptionally cheap crude.
East Coast refineries, like the one above owned by Philadelphia Energy Solutions, have been hurt by the loss of access to exceptionally cheap crude. PHOTO: DAVID PARROTT/REUTERS

Nov. 15, 2016 5:30 a.m. ET

Philadelphia Energy Solutions, operator of the largest oil refinery on the Atlantic coast, felt confident enough about its prospects last year that it filed to raise $272 million through a public offering.

But the company ditched those plans in September. It also let go dozens of workers, suspended pension contributions and delayed capital projects, according to a person familiar with the matter.

A year can make a big difference, as can a 75% decrease in the spread between the U.S. benchmark West Texas Intermediate and the European benchmark Brent.

That crude-oil spread-—which reached as much as $28 a barrel-—had long nourished East Coast refiners and given American refiners a competitive advantage over imports from their trans-Atlantic rivals. But the discount has narrowed with the drop in output from U.S. shale producers, tightening this year to $1.65, on average.

“They lost that lifeline of cheap crude,” said Robert Campbell, an analyst for Energy Aspects.

Philadelphia Energy Solutions declined to comment.

Refiners around the country have been hurt by the loss of access to exceptionally cheap crude, which they churn into fuels that could be sold at prices linked to the global oil benchmark.

But East Coast plants—squeezed by competition from abroad and from massive, efficient plants on the Gulf Coast—have always had thinner margins and have been hit hardest. Some had to curtail output amid a record fuel glut that hit the region this summer, a time when drivers typically take to the roads and sop up gasoline supplies.

“East Coast refiners are now operating in the same difficult environment that led to closures between 2009 and 2012,” said Sandy Fielden, director of oil and products research at Morningstar.

Delta Air Lines Inc. also has taken a hit. The Atlanta-based airline, which bought a refinery near Philadelphia in 2012 in hopes of reducing its jet fuel costs, recently said it expects the plant to lose $100 million this year. Two years ago, the airline bragged it could save $2 to $3 a barrel by bringing in 70,000 barrels of oil a day from North Dakota “at a significant discount to what we currently pay for Brent.”

Phillips 66 and PBF Energy Inc., which own plants in New Jersey and Delaware, have reported that refining margins in the region have halved from a year ago, largely because of the collapse in the crude discount.

For years, the price levels for U.S. and overseas oil moved close to lockstep, often with WTI trading at a premium to Brent because of differences in quality and the cost to transport the crude to the U.S., where gasoline demand is stronger than in Europe.

That started to change about a decade ago as excess output from U.S. shale fields began to build up in storage tanks. As the glut accumulated, U.S. crude began to trade at a steep discount to its European counterpart.

The spread reached its peak in 2011, when the WTI price of $86.80 was nearly $28 below that of Brent.

The boost to the East Coast refinery business rescued plants in a part of the country where refineries had been shutting down because they were losing money.

Some buyers bet they could pick up these refiners cheaply and turn them around. PBF Energy Inc., an independent refiner, bought plants in New Jersey and Delaware from San Antonio-based Valero Energy Corp. Carlyle Group, a private-equity firm, took a stake in a Philadelphia plant, helping form Philadelphia Energy Solutions, with the aim of upgrading it and building a new terminal to unload crude delivered from North Dakota.

For a time, the strategy worked. U.S. Crude imports by companies on the Eastern Seaboard plummeted by 54% between 2005 and 2014.

But the spread began narrowing in 2012. One factor was new pipelines that helped shale producers reach markets on the Gulf Coast. The collapse of oil prices was another blow.

Then in December, the federal government lifted restrictions that had banned most crude exports. That effectively allowed U.S. shale producers to sell excess supply on world markets at higher global prices. While the price gap had already narrowed significantly by the time that the export ban was lifted, analysts say it is one reason why the gap is unlikely to widen to previous levels.

Last year, average daily crude imports to the region crept up again for the first time in a decade. Just 135,000 barrels rode the rails eastward from North Dakota to the Atlantic in August, according to the most recent federal data, down nearly 66% from a year ago.

“Those days are gone,” PBF Energy Chief Executive Tom Nimbley said. “It’s very dangerous to be in a position where you’re betting on a differential staying the same forever,” he said.

Write to Alison Sider at alison.sider@wsj.com



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One Response to “U.S. Refiners Feel the Squeeze as Crude Oil Discount Disappears”

  1. daveyone1 Says:

    Reblogged this on World Peace Forum.

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