As FT Alphaville reported, a number of US refineries have had to mothball plants in the last month due to poor product margins. Ironically, this action may now be beginning to boost product cracks (the difference between crude and product prices and what determines refinery profitability).
As Stephen Schork reports on Thursday:
… the NYMEX spot 321 crack spread has rallied by 172 bps (see today’s Chart of the Day) since Valero’s announcement to close Delaware City. Last night the margin of products to WTI was over 10%. That is still well below range of the seasonal norm of around 13½%, but is marks a significant improvement from the 6.6% margin average we saw for the two weeks preceding Valero’s decision.
But he also asks the question: are cracks rallying because of decisions this quarter by refineries like Sunoco, Valero, et al to take capacity offline, or are cracks rallying in spite of those actions?
Of course, with downstream capacity along the Atlantic Coast fast becoming a “ghost town”, it doesn’t really matter what the answer is, according to Schork. All he knows is that owning product makes much more sense than owning oil.
And in case you missed it, we’d like to reprise the following chart reflecting year-to- November returns for the S&P GSCI index by individual commodity as highlighted by Matt Hougan over at Index Universe:
As can be seen, unleaded gasoline was the index’s fourth best performer in the year-to-November — although we do note the commodity did slip from second place back in June. Many of those gains, by the way, will have resulted from gasoline’s absolutely disastrous run in 2008 — when cracks even went negative — as well as as this year’s disproportionate demand for gasoline versus distillates due to industrial weakness.
Of course, with more refinery capacity now idled there’s a good chance unleaded gasoline prices could still be ripe for another comeback.