A view of the Marathon Petroleum Corp’s Los Angeles Refinery in Carson, California, April 25, 2020 after the price for crude plunged into negative territory for the first time in history on April 20.
Robyn Beck | AFP | Getty Images
Oil prices pared gains on Monday, despite the weekend announcement by OPEC and its allies, known as OPEC+, that historic production cuts of 9.6 million barrels per day across the group would continue through July as the coronavirus pandemic continues to weigh on demand.
The move spurred hopeful talk of a recovery for oil prices, which are down about 30% year-to-date after a 56% recovery for international benchmark Brent crude in the month of May. But data from refineries across several regions shows weak margins, or “crack spreads” — the difference between the price of crude that refiners buy versus the price that the market is paying for the refined products.
Higher crude costs without increased returns for the products refineries are selling suggests demand growth isn’t in line with the growth in prices, and could force refineries to buy lower crude volumes, translating into lower crude prices.
Very poor refining margins and the recent sharp decline in U.S. crude bases now comfort us in our sequentially bearish outlook.
Goldman Sachs Commodities Research Team
“One word of caution is if we look at the rally we’ve seen in crude oil prices, it’s been amazing, but the big uncertainty is if you look at refinery margins, they are very weak across the board across all regions,” Warren Patterson, head of commodities strategy at ING. “And what that suggests is that maybe demand isn’t recovering as quickly as many had anticipated, or at least it’s not keeping up with the move higher that we’ve seen in crude oil prices.”
The crack spread for refined products in the U.S. was at $9 last week, compared to $21 at the same time last year, Reuters reported, citing Refinitiv Eikon data. Margins for European diesel reached a record low of $2.90 per barrel last week.
“Very poor refining margins and the recent sharp decline in U.S. crude bases now comfort us in our sequentially bearish outlook,” analysts at Goldman Sachs wrote this week. They see Brent pulling back to $35 per barrel in the coming weeks, compared to spot prices at $43.
Saudi raising selling prices by most in 20 years
And soon to pressure refineries further is Saudi Aramco’s announcement over the weekend that it’s raising official selling prices (OSPs) for all of its customers in July, and for some the highest increases in twenty years.
Saudi selling prices will spike next month by $5 to $7 per barrel just for Asian buyers, for instance — “again further hitting refining margins,” Patterson said.
What refineries need is for the demand side to match up with the steady revival of crude prices, expected to gradually improve as economies reopen and lift their lockdowns meant to stem the spread of the coronavirus.
“Refiners are facing weak cracks (margins) at the moment and the current pick-up in crude prices will only make them worse,” said Edward Bell, commodity…
Read More: Oil rally and Saudi price spikes could hurt refiners, stifling market
