(Bloomberg) -- U.S. refiners are beginning to pick themselves up after long months of Covid-related demand destruction, the onslaught of hurricanes and a deadly freeze on the Gulf Coast.
On the horizon for 2022 are the prospects of fatter profit margins, stronger U.S. demand, export opportunities, whittled-down inventories and less competition after several shutdowns.
But that means refiners will have to be nimble and spend on costly, long-due maintenance work to take advantage of an improved market. In the past couple of years, many pushed off major turnarounds, settling for small repairs to keep units operable. Crude units and downstream units like catalytic crackers have been stressed from running below optimum rates during the height of the pandemic.
In Louisiana, Shell Norco is still trying to return to normal after being battered by Hurricane Ida in August and then a fire in its sole crude unit. Much of the Gulf Coast’s production was halted for weeks in February by a record freeze that also damaged units and operating systems.
“Everyone is looking at this gasoline market and saying we can’t miss out on this,” said Robert Campbell, head of oil products research at London consultancy Energy Aspects Ltd.
The market data is promising.
Refiners are keeping inventories in check: Gasoline stocks measured 219.3 million barrels in the week ended Dec. 3, which is 7.8% below a year earlier. Distillate inventories at 126.6 million a day were 16% below the year before. The 3-2-1 crack spread, which measures the profit for refining crude oil into products like gasoline and diesel, rose as high as $20.29 a barrel Monday, after dropping to near $16 Nov. 26
As for demand: The four-week average for products supplied was 20.9 million barrels a day, 10% above a year ago. The four-week average of seasonal gasoline demand rose to 9.08 million barrels a day. That’s the highest for this time of year since 2015.
Export opportunities are also looking good, with cheaper natural gas prices in the U.S. versus Europe “creating a structural advantage for U.S. refining,” said Andy Lipow, president of Lipow Oil Associates in Houston. Additionally, “if the omicron variant gets under control, the outlook for U.S. refining looks pretty good.”
Energy Aspects forecasts that maintenance will take out about 1.1 million barrels a day of U.S. crude capacity January through April, a number likely to rise as unplanned outages occur, said David Tonyan, a Houston-based oil products analyst for the consultancy. By comparison, maintenance reduced crude capacity an average of 1.2 million barrels a day for the same period in 2015-2019.
“There’s likely to be an increased level of turnaround outages this winter and spring, and that should also be good for margins. 2022 should be a good year for refiners,” said John Auers, executive vice president at Turner Mason in Dallas. “Many, including us, are optimistic for a pretty strong summer.”
Tonyan said Energy Aspects projects demand to continue improving the first half of next year, partially due to rising employment and declines in working from home. Summer demand will peak in August at 9.5 million barrels a day, compared with 9.8 million in August 2019. Demand will average 9.16 million barrels a day in 2022, lower than the 2019 average of 9.31 million, but above the 2021 average of 8.83 million, according to the consultancy.
Next year won’t be without challenges. Campbell and Auers say labor shortages of skilled workers to perform maintenance could limit how much maintenance could get done early next year.
Refining margins (in $/bbl):
- Maya U.S. Gulf coking at $14.85 (Dec. 10)
- LLS U.S. Gulf cracking at $13.46 (Dec. 10)
- WCS U.S. Midcontinent coking at $36.64 (Dec. 10)
- East Coast Forcados cracking at $9.15 (Dec. 10)
- U.S. West Coast WCS crude oil 3-2-1 crack spread at $39.11
- Nymex 3-2-1 front-month crack spread at $19.51
- For more crack spreads, see CRCK
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