ALDW is benefiting from crude supply back up, but pipes nearing development will enable produces to get a premium over WTI with a short flow distance to the Gulf, giving a disadvantage for ALDW crude supply.
NTI crude costs will hold up well, despite pipe and rail transport improving for their Bakken and Canadian crude, because they can buy the crude with little transport cost added. CVRR will lose some WTI-Brent spread as the Seaway reversal is expanded, but they yet have a good and growing local crude collection system (insignificant transport costs).
NTI and CVRR are good high yield refiners with good prospects for maintaining their crack spreads high, but ALDW will run into a reduced crack spread.
I'm avoiding all E&P, including LINE and VNR, as oil and gas supplies are growing faster than demand, and with the world's economies in structural weakness (aging demographics and overleveraged debt for governments and banks, and deficit spending by all major economies increasing, thus reducing private sector income from taxation), demand is not increasing, so there will be over-supply for years. The refiners are a reasonable way to play the domestic (USA and Canadian crude) supply-demand imbalances.
These refineries have a high Nelson Complexity Rating (NCR) such as NTI and ALDW uses WTS which has a higher discount, since not all refineries can process WTS. On the GOM the WTI is high price crude, more times than not, must compete with LLS. Brent is lower to compete, with the WTI delivered to the GOM. These high NCR refineries buys crude at a discount to the WTI price. This price must be less the transport deferential. These refineries have a price advantage to the East, West and GOM prices. As long as their local market can absorb their production, their crack spread is significant. The EIA crack spread was $14.02 yesterday 12 June. EIA uses LLS to calculate the Crack. Using the WTS the crack should be more. ALDW is profitable and with a retail network that does not need a middle man.
After the Flood – Gulf Coast Light Sweet Crude Pricing Beyond 2013
published by Sandy Fielden on Wed, 12/05/2012 - 19:05
[So to sum up - we have shown that light sweet crudes currently caught up in the Midwest logjam are being discounted unless they can reach the Gulf Coast by rail or barge. LLS crude produced at the Gulf Coast is priced higher against the Brent international benchmark. Crude flowing on the new pipeline infrastructure coming online in the next two years will push out imports of light sweet crude – as early as next year. The result will be a changing price environment for the benchmark light sweet WTI and LLS crudes.
WTI prices in Houston will become more important than they are today and Midland WTI prices will be higher than Cushing.
On the Gulf Coast LLS prices will be linked to WTI and Brent prices will disconnect from the US domestic market. ]
A veritable flood of more than 3 MMb/d of new crude production from the US and Canada will come into the Houston region by 2015 via long awaited new pipeline infrastructure. The most immediate impact will be to back out light sweet crudes from the Gulf Coast region – as early as 2013. Today we assess how the changes will affect light sweet crude pricing.
After The Flood
Now lets turn to what happens to light sweet crude prices after the flood. WTI will no longer be stranded in the Permian Basin and reliant on passage through Cushing to get to market. New capacity on the reversed Longhorn Pipeline among others (see New Adventures of Good Ole Boy Permian for the full list of additions and dates) will open up routes to Houston and further along the Gulf Coast to St James LA. To assess the impact we looked first at tariff rates on the new pipelines in place after the flood (see map below). For our analysis we assume that producers can find capacity on the new pipelines at the tariff levels publicized in their open season documents. The cost to ship WTI crude from Crane (close to Midland) to Hous
I have a couple of questions about your premise that crack spreads will drop for ALDW.
When will the new pipes be in service and what is their takeaway?
Can the increased production from the Permian keep up with the new takeaway? There are 500 rigs drilling in the Permian and the current output is approaching 1 million barrels/day.
The Big Springs refinery runs 76% WTS which trades at a significant discount to WTI. How will the new pipes affect this discount?
I don't think the overall dynamic is as simple as you make it out to be.
Your premise is right on. ALDW uses WTS which few refineries can process. This is why my contention is that high Nelson rated refineries will still profit from a good crack spread. In the future my definition of crack spread differential is the discount between WTI and WTS and the transportation by pipeline or R&R. Regardless of the WTI price this differential will exist.
From my previous post, this light WTI will have to be discounted versus LLS, so ALDW and others such as NTI will benefit from a discounted WTI plus transportation, versus local WTS and a local distribution market which both have.