As crude spread widens, margins improve for US refiners


* WTI-Brent differential crosses $10/barrel threshold

* Wider spread promises higher margins for Midwest refiners

* Gulf Coast refiners also set to gain, thanks to pipelines

* Railroads also stand to benefit

By Swetha Gopinath

Oct 24 (Reuters) - Oil refiners in the United States -including, for the first time, those on the Gulf Coast - are setto gain from a renewed widening of the price gap between theworld's two most actively traded crude contracts.

The closely watched spread between U.S. benchmark West TexasIntermediate (WTI) and European benchmark Brent returned across the $10 per barrel threshold this week.

The price differential evaporated in July for the first timesince 2010, and for the next couple of months was at anunusually low $2 to $6 per barrel in favor of Brent.

The widening spread is restoring high margins for Midwestrefiners, such as Marathon Petroleum Corp, which refinecheap U.S. crude into gasoline, diesel and other products to besold at prices linked to the more expensive Brent.

New pipelines are also making cheap inland crude easilyavailable to Gulf Coast refiners, boosting margins for companiessuch as Valero Energy Corp and Phillips 66.

"This is really the first time the Gulf Coast refiners areenjoying the benefits of U.S. production in a material way,"said John Williams, investment analyst at T. Rowe Price, whichowns shares in Valero and Phillips 66.

"When the differential was wide before, there weren'tpipelines bringing the oil to the Gulf Coast and now (refiners)can get their hands on the cheap oil that makes the differenceto their profitability."

Investors will need to wait at least another quarter beforethese higher margins show up in refiners' earnings. Results forthe third quarter, expected next week, are forecast to be weakas high crude costs have squeezed margins.

But shares of Midwest refiners in particular have begun tobounce back in anticipation of a recovery in the current quarterand beyond.

Shares of Delek U.S. Holdings Inc have climbed 26percent in the last month. Western Refining Inc is upabout 15 percent in the same period, while Marathon Petroleum isup 8 percent and HollyFrontier Corp nearly 4 percent.

"Refiner earnings have the potential to bounce back in thefourth quarter if recent crude spread trends continue," RaymondJames analyst Justin Jenkins said.


The widening spread is also positive for railroads thattransport cheaper inland crude to coastal refiners.

Because the Gulf Coast is now well served by pipelines, thebiggest opportunities exist for rail operators with routes tothe east and west coasts of the United States, analysts said.

"Both Norfolk Southern Corp and CSX Corp stand to gain from the growth in crude-by-rail, and a lack ofpipelines going east," said Cowen and Co analyst Jason Seidl.

Other railroad operators that stand to benefit from thewidening spread include Union Pacific Corp, Genesee &Wyoming Inc and BNSF Railway Co, a subsidiaryof Berkshire Hathaway Inc.

The differential between WTI and Brent, however, is notnecessarily on a consistent upward trend. Analysts expect it tobe volatile as stockpiles rise and fall at Cushing, the storagehub and delivery point for U.S. crude.

Rising U.S. shale oil supplies, coupled with lower demandduring the refinery maintenance season, has led to a build-up ofcrude at Cushing.

Analysts say these supplies could fall by the end of theyear as refineries complete maintenance and the southern leg ofTransCanada Corp's Keystone XL oil pipeline comes intoservice, diverting crude elsewhere.

Williams said the spread could tighten again in November andDecember to a dollar-per-barrel level in the mid to high singledigits, before rising back into double digits next year.

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