In the prior part, we saw that the benchmark crack, the USGC WTI 3-2-1, has slumped in the current quarter. It also stood lower on an average quarterly basis. In this part, we’ll look at the oil spread trend.
Oil spreads impact refiners’ margins and earnings. Thus, monitoring oil spreads could indicate the likely impact of the use of discounted crude oils on refiners’ profitability. In this article, we’ll review a couple of oil spreads vital to refiners, the Brent-WTI and the WTI Cushing-WTI Midland.
Oil spread trend in the fourth quarter
The Brent-WTI spread is vital for American refiners. Usually, global refined product prices move in line with Brent crude oil. Thus, the use of crude oil like WTI, which trades at a discount to Brent, supports refiners’ margins and earnings. In the current quarter, the Brent-WTI spread has widened by $3.4 per barrel YoY to $9.5 per barrel in the fourth quarter so far. This is a favorable scenario for refiners.
Also, certain crude oils trade at a further discount to WTI Cushing. Refiners that are positioned to use these discounted oils could benefit even more from the oil spreads. For instance, oil spreads like the WTI Cushing-WTI Midland are important for refiners like HollyFrontier (HFC) and Delek US Holdings (DK) because these companies can process WTI Midland crude in their refineries. HollyFrontier can refine 140,000 to 160,000 barrels per day of Permian oil. Plus, Delek can process around 70% of Permian oil in its refineries. WTI Midland can be bought at a discount to WTI Cushing. So, the wider the oil spread, the better for these companies.
The WTI Cushing-WTI Midland oil spread has stood at an average of $6.3 per barrel in Q4 2018 quarter-to-date compared to -$0.3 per barrel in Q4 2017. The increase in oil spread could expand refining margins and earnings year-over-year in the fourth quarter for refiners like HFC and DK.
Though refining cracks have narrowed in the current quarter, wider oil spreads could support earnings for refiners that are positioned to take advantage of these favorable spreads.