Refinery Outages Strengthen ULSD Basis in Gulf Coast, Mid Continent Markets; Seasonality Favors Bearish Momentum in ULSD Crack Spread

US available capacity remains suppressed following Winter Storm Inga. Gulf Coast capacity has fallen from 10.8 million to as low as 9.5 million and currently stands at 9.7 million. Marathon, EXXON, Valero, and CITGO have suffered major reductions in production. Mid Continent refining capacity remained flat through Winter Storm Inga, but is facing reduced capacity from prior storms. Currently, Mid Continent available capacity clocks in at 3.7 million with a total installed capacity of 4.1 million.

A large portion of affected capacity in the Mid Continent comes from Exxon Mobil’s Joliet refinery. In mid-December, Joliet’s production was significantly reduced following a malfunction at the crude distillation unit. Exxon Mobil has stated they expect production to be reduced through the first quarter of 2018. Repairs for the CDU have been scheduled for March 2018, and are expected to take over 40 days to complete.

The basis for Gulf Coast and Mid Continent markets have continually strengthened since January 12 as the nation faced extreme cold temperatures and snow accumulation. The Mid Continent basis has traded higher to just under -3.00 from -7.00. The Gulf Coast basis has risen from -12.00 to -8.00. As we move from winter to spring, we expect the basis to average higher prices from month to month. The basis typically forms bottoms in December or January and rises to seasonal highs. However, given the refinery outages across the country we may see a moderate decline as capacity comes back online.

 

As we transition into spring and summer, producers should be weary of any seasonal impacts on supply and demand. Under normal market conditions, we expect to see a reduction in demand for ULSD and subsequent contraction of the ULSD crack spread. Historical performance suggests the crack spread peaks in early February (week 6) before selling off in the spring and bottoming out in the summer. Appreciation in the spread can historically be expected to occur in July/August as market participants start speculating on future increases in ULSD demand.

Current pricing above the yearly average suggests we me be seeing the highs in the ULSD crack spread. Historically, any significant movement above the yearly-average in the winter time frame is followed by a corrective move lower. Price typically retraces to the average or lower depending on market supply and demand.

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