Why Marathon Petroleum’s Refining Margin Rose

Marathon Petroleum (MPC) witnessed a rise in its refining earnings in 4Q17, mainly due to higher refining margins in the quarter.

MPC’s refining margin rose from $11.30 per barrel in 4Q16 to $13.10 per barrel in 4Q17. That was due to a rise in blended LLS (Light Louisiana Sweet) 6-3-2-1 crack and the LLS-WTI (West Texas Intermediate) spread YoY (year-over-year). However, the sweet-sour spread fell YoY in 4Q17. Let’s look at those cracks and spreads in detail.

MPC’s refined product yields and crude consumption configuration closely matches the Chicago LLS 6-3-2-1 crack and the USGC (US Gulf Coast) LLS 6-3-2-1 crack. Thus, MPC estimates blended LLS 6-3-2-1 crack, which is an average of the Chicago LLS crack and the USGC LLS crack, weighted for region-wise refining capacity.

In 4Q17, the Chicago LLS crack rose $4.80 per barrel YoY to $11.10 per barrel. The USGC LLS crack rose $0.80 per barrel over 4Q16 to $8.90 per barrel in 4Q17. The effect of the rise in both of these cracks is visible in the blended crack. In 4Q17, the blended LLS crack rose $2.40 per barrel over 4Q16 to $9.80 per barrel.

Marathon Petroleum can intake a large quantity of sour crude oil in its refineries, which can be acquired at a discount to sweet crude oil. So the higher the sweet-sour differential, the better it is for MPC. Similarly, the greater the LLS-WTI differential, the better it is for MPC. In 4Q17, the LLS-WTI differential rose $4.30 per barrel to $5.60 per barrel. But the sweet-sour spread fell $0.10 per barrel over 4Q16 to $6.10 per barrel in 4Q17.

In the next part, we’ll take a look at MPC’s refining yields and how they trended in 4Q17.