Continued from Part 4
Crack spreads and regional differences
Representative crack spreads can vary widely from location to location, and therefore so can refiners’ margins. This is because the cost of crude oil can vary in different areas, as can the selling price of gasoline and distillates. As we discussed earlier, some Gulf Coast refineries have had to purchase crude oil closer in price to Louisiana Light Sweet (LLS) rather than WTI Cushing, and LLS had traded at a premium to Cushing for much of the past two years. Additionally, at some points, WTI Midland (which represents crude prices in the Permian Basin region in West Texas) has traded at a significant discount to WTI Cushing, meaning refiners with access to the West Texas crude had a profit advantage.
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When differentials between various crudes become wide enough, refineries may look for ways to access the cheaper crude so they’re not completely bound by geographical constraints. For example, Tesoro Corp. (TSO) announced in mid-2012 a plan to move 50,000 barrels per day of crude from the Bakken region in North Dakota to its refinery in Anacortes, Washington. Bakken crude was trading significantly below where seaborne West Coast bound crude was trading, and the differential between the two crudes had to be larger than the rail transportation cost for TSO to make that decision.
Additionally, the prices of products like gasoline can vary from region to region. For example, West Coast gasoline prices tend to be more expensive than other regions. The Washington State Quarterly Gas Report dated April 1, 2013, stated, “The West Coast is a unique market in the United States in terms of supply, demand, and production of gasoline. As a result, the average price of gasoline tends to be higher than other areas of the country. Unlike the rest of the United States, the West Coast has limited refineries and pipeline capability. The majority of crude oil in the United States is delivered and refined in the Gulf States where it is efficiently distributed via a network of pipelines. In contrast, the West Coast and Washington in particular remain isolated with minimal pipelines. In addition, due to our geographical and social factors, the West Coast exceeds the national average for gasoline consumption.”
Continue to Part 6: Recent trends in crack spreads
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