The NYMEX November RBOB crack spread had widened by 62cts near midday on Tuesday to $8.24/bbl over West Texas Intermediate futures, but RBC Capital Markets believes the still narrow margins could come under more pressure.
In a Tuesday research note, the bank suggested that US refiners will continue to run at the highest utilization rates possible thanks to the substantial profits available for diesel and jet fuel, adding that gasoline “will continue to be a byproduct of the refining network.”
While gasoline cracks have recently plunged into single digit territory, the return on diesel remains substantial. Tuesday morning trading, for example, saw ULSD futures priced at more than $40.50/bbl over WTI. Diesel cracks were higher at various times in 2022, but when viewed in the context of the last few decades, distillate is producing significant returns for refiners.
RBC said gasoline cracks aren’t low by historical standards and have only been below Monday’s closing number just about 5% of the time over the last five years. But the financial incentive for refinery runs clearly comes from “holistic” margins, the bank said. Distillate cracks are currently stronger than what has been witnessed 79% of the time over the last five years. A simple industry blended crack (the 3-2-1) is now higher than it has been for 53% of the sessions over the last five years, RBC said.
The bank’s commodities team said the gasoline crack has narrowed by 68% over the last month, but warned that gasoline is not a bargain during an oversold period. U.S. stocks have increased by 12.2 million bbl over the last month thanks to high runs. September refinery utilization reflected the highest run rate in the post pandemic era at 16.2 million b/d.
“Unless cracks re-rate significantly lower, gasoline output will remain strong and gasoline will continue to be the negative byproduct of tight distillate stocks,” the bank said.
RBC said gasoline yields have averaged 46% over the last 30 years, ranging from a low of 41% in April 2020 to a high of 48.7% in September. Since the pandemic, there is little evidence of any voluntary run cuts, perhaps because the middle of the barrel has been so profitable.
And RBC said it believes that any rally in NYMEX gasoline cracks would represent a selling opportunity.
The bank’s negative view on refining margins for gasoline is bolstered by expectations that both the Dangote refinery in Nigeria and the Dos Bocas refinery in Mexico will begin producing gasoline and diesel.
While both facilities have the potential to reduce U.S. gasoline exports in the future, a number of industry sources don’t believe either will provide much supply this winter.
This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.
-Reporting by Tom Kloza, [email protected]; Editing by Jeff Barber, [email protected]
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