Wednesday -- February 18, 2015

Active rigs:

	2/18/2015	02/18/2014	02/18/2013	02/18/2012	02/18/2011
Active Rigs	135	185	180	199	171

RBN Energy: update on refiners.

According to EIA, refinery utilization in the Midwest was at record levels last year and reached over 100% for the week ending July 11, 2014 before the price crash took hold.

How did refinery utilization get over 100%? That was because utilization rates are based on “normal” refining conditions that can be exceeded when refineries are firing on all cylinders. The average utilization in the Midwest over 2014 was 93% and the average 4-3-1 crack spread was just under $16/Bbl making it a very profitable year for regional refiners. In fact, Midwest refiners have enjoyed healthy refining margins since the boom in domestic shale crude production began in 2011.

Increased crude supplies have flooded into the region from the Bakken and Niobrara plays as well as from Western Canada - leading to congestion at the Midwest trading hub in Cushing, OK and crude price discounts compared to international levels.

Discounts for U.S. and Canadian crudes priced against U.S. domestic benchmark West Texas Intermediate (WTI) at Cushing meant that Midwest refiners enjoyed cheaper feedstock than their coastal rivals who were paying higher prices based on international benchmark Brent crude for more on the Brent/WTI relationship. Because refined product prices were still set at higher levels by international markets, the lower feedstock cost of advantaged crude meant Midwest refiners enjoyed high margins as long as WTI was priced at a wide discount to Brent. Since June of 2014 however, falling crude prices in general have eroded the domestic crude price advantage as the spread between WTI and coastal crude prices collapsed – although the Brent premium over WTI has opened up again in the past week. In the circumstances you might have expected refining margins at Midwest refineries to weaken as the Brent premium to WTI narrowed.

So while it has been a bumpy ride for Midwest refiners in the past couple of months, the recent recovery in margins indicates that refining remains profitable in the region even as some of their crude supply advantages evaporated during the final quarter of 2014. For the immediate future, the build up of crude inventories at Cushing to take advantage of the contango storage play suggests that crude prices in the Midwest will remain under pressure from an oversupplied market – keeping refining margins robust so long as the refined product outputs can find a market.