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US Oil Refineries, Cranking Away... Except on the Atlantic Coast

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Last week, runs were above 90% throughout the country, with one notable exception.

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The US Energy Information Administration released its latest oil data report Wednesday, and included in this report were regional averages of refinery utilization rates.

Although analysts polled by Platts Monday were slightly off, expecting the average national run rate to increase to 93.1% of capacity, run rates at 92%--what the EIA reported for last week--mark a break in a trend where recent run rates have been approaching levels not seen in the US since a 93.6% run rate back in July 2007.

But back in the summer of 2007, the economy was on cruise control. US petroleum demand, measured by the EIA's "product supplied
figure", was just above 21 million b/d. Last week, petroleum demand was 18.5 million b/d.

Obviously, economic prospects are not quite as rosy these days.

Refinery runs are also being lifted by exports. While the most precise data lags by about two months or more, the EIA's most recent weekly export data--which is always heavily subject to revision--showed US total exports recently running just under 3 million b/d. While the weekly numbers have cracked 3 million b/d a few times earlier this year, the recent numbers are some of the highest on record. (In summer 2007, the figure was closer to 1.2 million b/d).

Clearly, US refiners are maintaining strong levels of output. Last week, runs were above 90% throughout the US, with the exception of the beleaguered Atlantic Coast.

So why are refinery run rates so high? And why are they high everywhere but the Atlantic Coast, the region that arguably sets the marginal price of gasoline by being both a region of higher than average demand, as well as home to the delivery point of the NYMEX RBOB futures contract?

Atlantic Coast refining runs have room to grow, despite a recent shaving of operable capacity. At 82% of capacity last week, Atlantic Coast run rates were 0.7 percentage points above year-ago levels. But last year, capacity was 430,000 b/d greater, at 1.618 million b/d, before various shutdowns intervened.

Comparatively, run rates for US Gulf Coast refineries last week averaged 94.2% of capacity. Midwest refineries averaged 93.8% , West Coast refineries averaged 90.9% and Rocky Mountain refineries averaged a whopping 97.5%. Even though the Rockies represent a very small segment of the sector as a whole, the number is about as close to 100% as this data is likely to ever get; there's always a problem somewhere, even if minor.

US refining margins have been strong enough for quite a while now to encourage higher runs. The Gulf Coast Light Louisiana Sweet cracking margin, for instance, averaged $16.69/b last week, according to Platts data and Turner, Mason & Co. yield formulas.

Refining margins in the Midwest have greatly outpaced Atlantic Coast margins over the recent past, helped in part by higher Canadian imports and US shale oil production out of the Bakken, backing up at the NYMEX trading hub in Cushing, Oklahoma.

Midwest WTI cracking margins have skyrocketed recently, averaging just over $30/b for June 2012. Comparatively, Midwest margins averaged $23/b in June 2011 and just $7/b in June 2010. While margins averaged $10/b in June 2009, they were negative for the the month of June 2008.

Meanwhile, USAC Bonny Light refining margins have averaged $12/b over the same period in 2012. Going down the line, USAC Bonny Light margins averaged around $5/b for June in each of 2011, 2010 and 2009, and averaged just over $1/b for June 2008.

Things haven't changed; the recent margin improvements in the Midwest can be attributed to cheaper crude streams such as Canadian imports and Bakken shale oil, created both by higher production and logical constraints that's keeping plenty of crude locked in the Midwest, even after the recent Seaway reversal.

Further, over the past few years both Midwest and Gulf Coast refinery owners have made significant investments in upgrading their coking capacity so that they would better suited to profit from running heavier crudes. They have, in essence, optimized their refineries to handle a wider variety of crude oil inputs.

So what happened with Atlantic Coast refineries? It's basically a case of foregone investment in lieu of choosing light, sweet crude imports from places like Nigeria.

Instead of reinvesting in expensive additional coking capacity, as many refiners in the Midwest and Gulf Coast have done in order to process cheaper heavier crude streams, USAC refiners chose to save the money, and bet they could maintain margins on light, sweet imports like Bonny Light.

And it must have seemed like a wise move to investors at the time: Why lay out billions in costly upgrades when international oil markets reflected an increasing trend toward more US imports of light, sweet barrels. But that was hit by the shale revolution, with Atlantic Coast refiners needing to compete against product coming out of refineries benefiting from cheaper crude; a tight North Sea market that has driven up the price of Brent relative to other crudes; and the collapse in European demand, which put more gasoline into the export market.

However, it does not explain why airlines like Delta (DAL) and private equity firms like Carlyle are in the market. That is fodder for another story, but clearly these groups believe they can get a leg up on weak Atlantic Coast refining margins by bringing supplies of crudes such as Bakken to the USAC.

This article was written by James Bambino and originally appeared on Platts' The Barrel.

No positions in stocks mentioned.
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