The NYMEX November RBOB crack spread widened by 62cts near midday on Tuesday to $8.24/bbl over West Texas Intermediate futures, according to a research note by RBC Capital Markets. However, the bank warns that narrow margins could face further pressure.
Refiners Focusing on High Utilization Rates
US refiners are expected to continue running at maximum utilization rates due to the substantial profits available for diesel and jet fuel, with gasoline being a byproduct of the refining network, as stated in the research note.
Diesel Maintains Strong Returns
While gasoline cracks have recently dipped into single-digit territory, the return on diesel remains substantial. ULSD futures were priced above $40.50/bbl over WTI in Tuesday morning trading, signaling lucrative returns. Although diesel cracks have been higher at times in 2022, the overall historical context reveals significant returns for refiners in the distillate market.
Gasoline Cracks Not Unusually Low
RBC Capital Markets clarifies that gasoline cracks are not unusually low when compared to historical standards. In fact, over the last five years, they have only been below Monday’s closing number about 5% of the time. However, the bank emphasizes that the financial incentive for refinery operations comes primarily from “holistic” margins, rather than solely focusing on gasoline cracks.
Robust Distillate Cracks and Industry Blended Cracks
Currently, distillate cracks are stronger than 79% of the time over the past five years. Additionally, the simple industry blended crack (the 3-2-1) is now higher than it has been for 53% of the sessions over the past five years, indicating favorable conditions for refiners.
In conclusion, RBC Capital Markets highlights the potential pressure on narrow margins despite the widened RBOB crack spread. Refiners continue to focus on high utilization rates to capitalize on profitable diesel and jet fuel markets, with gasoline production remaining a byproduct. Distillate cracks and industry blended cracks present significant opportunities for refiners, further underscoring the financial incentive for refinery operations.
Gasoline Crack Narrows, But Caution Remains
The commodities team at the bank has observed a significant 68% decrease in the gasoline crack over the past month. However, they are cautioning against considering gasoline as a bargain during this oversold period.
One reason for the increase in U.S. stocks by 12.2 million bbl over the last month is the high runs. In fact, September refinery utilization recorded the highest run rate since the start of the pandemic, at 16.2 million b/d.
The bank warns that unless cracks experience a noteworthy decline, gasoline production will remain robust, making it a negative byproduct of tight distillate stocks.
Over the last 30 years, gasoline yields have averaged 46%, with a range of 41% in April 2020 to 48.7% in September. The bank notes that there has been little evidence of voluntary run cuts since the pandemic, as the profitability of the middle of the barrel has been significant.
In addition, RBC suggests that any rally in NYMEX gasoline cracks should be viewed as a selling opportunity.
The bank’s negative outlook on refining margins for gasoline is supported by the expectation that two major refineries, the Dangote refinery in Nigeria and the Dos Bocas refinery in Mexico, will begin producing gasoline and diesel. However, industry sources do not anticipate a substantial increase in supply from these facilities during the winter season.