Distillate Crack Spreads Return to February 2022 Levels: EIA

Distillate crack spreads in the USA have dropped down to February 2022 levels, 15 months after the disruption of the global crude oil and petroleum product markets due to the Russian invasion of Ukraine, the USA Energy Information Administration (EIA) said Wednesday.

However, the distillate crack spreads remain “high by historical standards”, the EIA said. The average crack spread measured by the agency for May was 54 cents per gallon, 65 percent higher than the 10-year average of 33 cents per gallon in the period of 2012-2021. Low distillate inventories are contributing to higher crack spreads, according to the report.

The EIA defines crack spreads as differences between wholesale product prices and crude oil prices, based on one or two refinery products. They are often used to estimate refining margins, exclude refining costs other than the cost of crude oil, and do not take into account all refinery product revenues.

Higher crack spreads usually encourage oil companies to produce more petroleum products and take advantage of the higher margins. Increased production has not yet resulted in a “substantial increase” in distillate inventories, according to the report. However, the agency’s latest short-term energy outlook report predicts an increase in refinery capacity, resulting in higher refinery production and slightly higher inventories by mid-2024. “Increased refinery capacity coming from ExxonMobil’s Beaumont refinery expansion combined with LyondellBasell’s decision to delay closing its Houston refinery until 2025 could help to increase inventories”, the EIA said. If its forecast is realized, “upward price pressure due to lower-than-average inventories could keep distillate crack spreads elevated compared with pre-2022 levels”, the EIA said.

The distillate crack spread rose to a historical high of $1.72 per gallon in October 2022, more than four times higher than the previous five-year average, according to the report. Since then, USA distillate crack spreads have dropped because “new trading patterns eased supply concerns and warmer-than-normal weather reduced distillate consumption during the winter”, the EIA said.

Movement Since Early 2022

The report said that distillate prices and crack spreads rose rapidly in early 2022 as the possibility of lower exports from Russia increased crude oil prices to their highest levels since 2014. Russia has historically been the top supplier of distillates to Europe. Since distillates are a globally traded commodity, supply fears also impacted USA crack spreads even though most distillate exports from the USA are sent to Latin America, according to the report.

Crude oil prices dipped in the second half of 2022, but distillate prices increased once again due to seasonal demand and higher shipping costs following the European Union’s (EU) announcement of a ban on petroleum product imports from Russia, which began in February 2023, the EIA said. In the four months since February, Russia’s exports to Europe dropped 96 percent to 24,000 barrels per day (bpd) from 630,000 bpd in 2022, according to the report. Over the same period, Middle Eastern exports to Europe rose 51 percent to 160,000 bpd, Asian exports to the region soared by 97 percent to 147,000 bpd, and North American exports increased by 65 percent to 47,000 bpd, the report said.

Additional factors cited in the report were China’s return to historical levels of distillate exports in the fourth quarter of 2022 and Russia’s distillate exports increasing six percent in the last four months compared with last year’s average, as it diverted its exports away from Western nations amid sanctions.

USA distillate consumption during the winter heating season of October 2022 to March 2023 averaged 3.98 million bpd, which was three percent below the previous five-year average, the report said. A cold weather front in December 2022 significantly limited transportation in the Midwest and Northeast, reducing diesel consumption for that month to its lowest level since 2012. Consumption of heating oil averaged 358,000 bpd last winter, which is 12 percent less than the figure for the 2021–2022 winter heating season, according to the report.

To contact the author, email rteodoro.editor@outlook.com