There was a time that midwest oil refineries were at the mercy of the cheaper crude from the American gulf coast, that has all changed with cheap crude flowing to them feeding record refining in the region.
There was a time that midwest oil refineries were at the mercy of the cheaper crude from the American gulf coast, that has all changed with cheap crude flowing to them feeding record refining in the region. Midwest refining capacity rose to 3.9 million barrels per day (bpd) of crude by 2016 Reuters reports, the highest annual volume on record.
“Ten years ago, we were 1 million barrels per day short on products, with the Gulf Coast supplying the product. Today, the midcontinent is flush with products,” Marathon Petroleum Chief Executive Gary Heminger told Reuters. Wood Mackenzie refinery analyst Andrew Shepard said “500,000 bpd of gasoline this year to a surplus of roughly 200,000 bpd by 2030.”
It has been a real game changer for crude pricing and competition in the U.S. Prior to the huge investment from companies like Marathon transorting Canadian and North Dakota Crude or years, Gulf refiners could underprice their Midwest competitors in cities like Chicago and Indianapolis. In this scenario there was easy money for the Gulf traders to sending gasoline North in summer. Now the crude production in western Canada and North Dakota of crude sells at a discount against the U.S. benchmark price routinely Reuters reports.
“Chicago gasoline peaked at a premium of 14 cents a gallon versus the future contract this summer, much less than the summer premiums of nearly 40 cents in 2014 and 2015” Reuters reports
With Hurricane Harvey effectively forcing the issue by culling half of the Gulf’s capacity, Midwest refiners ramped up and processed a record 4.06 million (bpd) of crude oil in late August and early September, 12 percent more than the 2016 average.
Bakken and Canada Flows Triple to the Midwest
The Rockies, including the Bakken, sent 550,000 bpd to the Midwest last year, triple the volumes from 2010 before Dakota Access opened. Phillips 66 and Marathon Petroleum are minority partners in the line, which opened in 2017 and can pump as much as 525,000 bpd.
Canada has sent an average of 2.1 million bpd of crude through June of this year, more than triple the rate from two decades ago. Marathon’s Detroit refinery hit a record high of 137,400 bpd last year and BP’s 430,000 bpd Whiting, Indiana, refinery can now process up to 85 percent heavy crude. That is up from 20 percent before the upgrades.
Analysts and traders don’t expect this to last, why not? The Midwest now has the cheaper access and has no reason to change at this point. For consumers, and therefore politicians this is a positive shift that they would like to see maintained.
Gasoline spreads and freight pricings will be the key moving forward.
Source: Reuters, API
Read More: U.S. Midwest oil refiners boost output, cut region’s dependence on Gulf Coast