2004: sign of the future for refiners? joanne shore john hackworth energy information administration...
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2004: Sign of the Future for Refiners?2004: Sign of the Future for Refiners?
Joanne Shore
John Hackworth
Energy Information Administration
NPRA Annual Meeting
March 2005
www.eia.doe.govwww.eia.doe.gov
PerspectivePerspective
“In the business world, the rearview mirror is always clearer than the windshield.”
Warren Buffet (1930- )
“The trouble with our times, is that the future is not what it used to be.”
Paul Valery (1871-1945)
2004: A Year of Highs2004: A Year of Highs
• High Prices• High Price
Differentials• High Margins
Shifts in Crude Oil Price LevelsShifts in Crude Oil Price Levels
$0
$10
$20
$30
$40
$50
$60Ja
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Jan
-92
Jan
-93
Jan
-94
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Jan
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-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
$/B
arre
l
$20 Midpoint
$30
$40+?
Monthly Average WTI Spot Price
Source: Bloomberg West Texas Intermediate Crude Cushing spot price
Shifts in Light-Heavy Crude Oil Price Shifts in Light-Heavy Crude Oil Price DifferentialsDifferentials
$0$2$4$6$8
$10$12$14$16$18$20
Jan
-91
Jan
-92
Jan
-93
Jan
-94
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-96
Jan
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-99
Jan
-00
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-02
Jan
-03
Jan
-04
Jan
-05
$/B
arre
l
WTI-MayaWTI-MarsWTI-WTS
Light-Heavy Crude Price Differentials
Source: Bloomberg spot prices
Shifts in MarginsShifts in Margins
$0
$5
$10
$15
$20
$25
$30
$35J
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Do
llars
Pe
r B
arr
el Monthly
Annual Average
Gulf Coast 3-2-1 Spread (Simplified Gross Margin)
Note: 3-2-1- spread assumes 3 barrels of crude oil produce 2 barrels of gasoline and 1 barrel of distillate.
Source: Bloomberg spot prices Gulf Coast conventional gasoline, No. 2 heating oil, WTI
QuestionsQuestions
• What drove crude prices up in 2004?• What caused the light-heavy crude price
differences to change in the short run?• What role did refinery capacity and heavy
crude oil production play in 2004 light-heavy crude oil price differentials?
• Are higher refinery margins going to continue in the future and what lies ahead for refinery capacity?
Drivers Behind Crude Price IncreasesDrivers Behind Crude Price Increases
• Tight markets: Demand outpacing supply
• Little spare crude oil production capacity
Significant OPEC Production Growth Significant OPEC Production Growth Required in 2004-6 To Balance DemandRequired in 2004-6 To Balance Demand
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2000 2001 2002 2003 2004 2005 2006
Mill
ion
Bar
rels
Per
Day
ForecastAnnual World Oil Demand Growth
Annual Non-OPEC Capacity Growth
Source: EIA; Forecast Short-Term Energy Outlook, February 2005
2.3
2.4
2.5
2.6
2.7
2.8
2.9
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
Bil
lio
n B
arre
ls
NOTE: Colored Band is Typical Stock Range (1998-2002Average +/- 7 year Standard Deviation)
OECD Commercial Petroleum Inventories
World Market Balance was Tight, But World Market Balance was Tight, But Similar to 2003Similar to 2003
Source: International Energy Agency, Data Base 2/10/05
Venezuela
Surplus Crude Oil Production Capacity Surplus Crude Oil Production Capacity Shrank in 2004Shrank in 2004
012345678
Jan
-90
Jan
-91
Jan
-92
Jan
-93
Jan
-94
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Mill
ion
Bar
rels
Per
Day
OPEC Surplus Crude Oil Production Capacity
Source: EIA Estimates
Available Crude Capacity Affects PriceAvailable Crude Capacity Affects Price
0
10
20
30
40
50
60
0 1 2 3 4 5 6 7 8
Surplus OPEC Capacity (MMB/D)
WT
I Pri
ce (
$/B
arre
l)WTI Crude Price vs. OPEC Surplus Crude Production Capacity
Source: Bloomberg WTI Spot April 1999-Jan 2005; EIA Calculations
Surplus Crude Oil Production Capacity Surplus Crude Oil Production Capacity & Inventories Explain Price& Inventories Explain Price
$0$5
$10$15$20$25$30$35$40$45$50$55
Jan
-92
Jan
-93
Jan
-94
Jan
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Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
$/B
arre
l
WTI Actual
DynamicForecast
Monthly Average WTI Crude Oil Price
Source: EIA
QuestionsQuestions
• What drove crude prices up in 2004?• What caused the light-heavy crude price
differences to change in the short run?• What role did refinery capacity and heavy
crude oil production play in 2004 light-heavy crude oil price differentials?
• Are higher refinery margins going to continue in the future and what lies ahead for refinery capacity?
General Market Factors Affecting General Market Factors Affecting DifferentialsDifferentials
Market Dimension
Crude Market
Supply of light vs. heavy, price level
Refining Capacity
Availability of conversion
Product Market
Residual fuel vs. light product markets
Heavy vs. Light Price Differentials Rise Heavy vs. Light Price Differentials Rise As Crude Price RisesAs Crude Price Rises
Crude Oil Price
Increases
Light Product Prices
Increase
Residual Fuel Prices “Flat”
Light Crude Oil Prices Increase
Most
Heavy Crude Oil Prices
Increase Least
Light-Heavy Product Price Difference Light-Heavy Product Price Difference Increases with Crude Oil PriceIncreases with Crude Oil Price
0
10
20
30
40
50
60
70
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5
$/B
arr
el
No. 2 Heating Oil Gulf Coast
WTI Crude Price
3% Resid Gulf Coast
Crude Oil, Distillate, Residual Fuel Prices
Source: Bloomberg spot price
Light-Heavy Product Price Differential Light-Heavy Product Price Differential & Crude Oil Price& Crude Oil Price
$0$5
$10$15$20$25$30$35$40$45$50$55
Ja
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Do
llars
/Ba
rre
l
GC No.2 - 3% S Resid
NWE No.2 - 3% S Resid
WTI Crude Price
Crude Price & Price Differentials
Source: Bloomberg spot prices – GC - Gulf Coast, NWE-Northwest Europe ARA Barge, WTI – West Texas Intermediate Cushing
Light-Heavy Crude Price Differential & Light-Heavy Crude Price Differential & Crude Oil PriceCrude Oil Price
$0
$3
$6
$9
$12
$15
$18J
an
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Lig
ht-
He
av
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iffe
ren
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$0
$10
$20
$30
$40
$50
$60
Cru
de
Pri
ce
WTI-Maya
WTI Crude Price
Crude Price & Price Differential ($/Barrel)
Source: Bloomberg spot price
Light-Heavy Price DifferentialsLight-Heavy Price Differentials
$0$4$8
$12$16$20$24$28$32$36
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Pro
du
ct P
rice
Dif
fere
nti
al
$0$2$4$6$8$10$12$14$16$18
Cru
de
Pri
ce
Dif
fere
nti
al
No.2 - 3%S Resid
WTI-Maya
Crude and Product Price Differentials ($/Barrel)
Source: Bloomberg spot price
QuestionsQuestions
• What drove crude prices up in 2004?• What caused the light-heavy crude price
differences to change in the short run?• What role did refinery capacity and heavy
crude oil production play in 2004 light-heavy crude oil price differentials?
• Are higher refinery margins going to continue in the future and what lies ahead for refinery capacity?
Theories on How Capacity Constraints Theories on How Capacity Constraints Drove Light-Heavy DifferentialsDrove Light-Heavy Differentials
• Overall world refining capacity limit
• Constraints on conversion capacity
Theory on Overall Capacity Limit Theory on Overall Capacity Limit ConstraintsConstraints
Assumption• Light product demand
is increasing• World refining
capacity is running at maximum utilization
• Refiners desire to substitute light for heavy crude oil
• But additional light crude oil not available
Results• Light product stocks
drop sharply • Price for light products
rise sharply• Product price pulls
crude prices up and pulls light crude up more than heavy
• Additional heavy crude oil won’t be used
Evidence to Support Hitting Capacity Evidence to Support Hitting Capacity Limits?Limits?
• Did light product stocks drop & price spike?
• Any signs that incremental heavy crude oil production was not used?
• Was world refining running at maximum utilization?
Is World Refining Capacity Running at Is World Refining Capacity Running at Maximum Levels?Maximum Levels?
• Sometimes world capacity compared to wrong demand
• Must look at regional refinery utilizations• Will show that world capacity not at
maximum utilization, but demand growth is outpacing capacity growth – for the moment
Asia is Where Major Increases in Asia is Where Major Increases in Refinery Utilization is OccurringRefinery Utilization is Occurring
• Asian utilization increased, but “Asia” varies immensely
• China and India are big demand drivers and are adding capacity (soon enough?)
• Singapore export center utilization increased
Singapore Utilization PatternSingapore Utilization Pattern
50556065707580859095
100Ja
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-99
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-00
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-04
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-05
Per
cen
t
Capacity Utilization (Crude Inputs/Distillation)
Source: EIA, IEA, BP
World Capacity Utilization Up World Capacity Utilization Up But Not at Maximum But Not at Maximum
(Percent Inputs*/Distillation Capacity)(Percent Inputs*/Distillation Capacity)
1998 2003 2004
U.S. 95.5 92.5 92.8
EU-15 94.5 88.9 91.3
Latin America 81.4 74.4
Middle East 93.0 87.1
* U.S. utilization calculation uses gross inputs, other regions’ utilizations use crude oil inputs.
Source: EIA, IEA & BP
Theory: Conversion Capacity Theory: Conversion Capacity Constraints Drove DifferentialsConstraints Drove Differentials
Assumption• Light product demand
increasing• Refinery conversion
capacity running at maximum utilization
• Increased crude oil supply is heavy sour
Results• Demand for light
crude oil increases• Added heavy crude oil
run without benefit of conversion
• Residual fuel oil yield increases
• Over-supply of residual fuel oil
Evidence to Support Being at Refinery Evidence to Support Being at Refinery Conversion Limits? Conversion Limits?
U.S. Clues• Did U.S. complex refiners
increase light crude to maximize light products
• Did they experience a residual fuel yield penalty?
World Clues• Did world residual yields
increase?• Signs of a flood of residual
supply?
U.S. Refineries Run Range of Crude Oil U.S. Refineries Run Range of Crude Oil ImportsImports
0
500
1000
1500
2000
2500
3000
3500
4000
<10% 10-30%
30-50%
50-70%
70-90%
>90%
Refineries by Percent Sweet Imports
Th
ou
san
d B
arre
ls P
er D
ay
Hvy Sour
Med Sour
Lt Sour
Med+Hvy Swt
Lt Sweet
Individual Refinery Crude Import Mixes 2003
Source: Form EIA-814; includes refineries in Virgin Islands & Puerto Rico
Signs of U.S. Preferring More Heavy as Signs of U.S. Preferring More Heavy as Light-Heavy Differential IncreasedLight-Heavy Differential Increased
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan
-04
Feb
-04
Mar
-04
Ap
r-04
May
-04
Jun
-04
Jul-
04
Au
g-0
4
Sep
-04
Oct
-04
Hvy Sour
Med Sour
Lt Sour
Med+Hvy Swt
Lt Sweet
Crude Imports for a Mixed-Crude Company
Source: Form EIA-814
Complex Refiners Used More Heavy Sour As Complex Refiners Used More Heavy Sour As They Optimize Multiple Crude TypesThey Optimize Multiple Crude Types
21.1 21.1
11.1 9.0
18.4 20.0
14.5 10.0
34.9 39.9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 Jan-Oct
Heavy Sour
Medium Sour
Light Sour
Medium & HeavySweet
Light Sweet
9 Gulf Coast Refineries Using Mixed Crudes
Source: Form EIA-814
Crude Mix Changed with Little Yield Crude Mix Changed with Little Yield ImpactImpact
Product Yields for 9 Gulf Coast Refiners Using Mixed Crude Oils
Yields 2003 Jan-Nov 2004 Jan-Nov
Gasoline 49.8 50.2
Light Products 80.5 80.9
Residual Fuel Oil 3.3 3.8
Source: Form EIA-810
Aggregate OECD Residual Fuel Yields Aggregate OECD Residual Fuel Yields Did Not IncreaseDid Not Increase
0
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20
25Ja
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-96
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-99
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-00
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-02
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Jan
-04
Yie
ld (
Per
cen
t)
Residual Fuel Oil Yield (Productinon/Crude Input)
OECD Asia
OECD Europe
North America
Residual Fuel Oil Stock Build Not Residual Fuel Oil Stock Build Not OverwhelmingOverwhelming
0
20
40
60
80
100
120
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Mil
lio
n B
arre
ls
Residual Fuel Inventories (Month End)
OECD Asia
OECD Europe
North America
Still, Light Heavy Crude Price Differences Relate Still, Light Heavy Crude Price Differences Relate to Refineries without Bottoms Upgrading to Refineries without Bottoms Upgrading
$0
$2
$4
$6
$8
$10
$12J
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LLS-Mars
Cracking Refinery ProductWorth: LLS- Mars
Price & Value Differences
Hurricane
Sources: Yields – IEA Users Guide 2004; Spot prices Bloomberg
Crude Oil Price was Primary Factor in Crude Oil Price was Primary Factor in 2004 Differential Increase2004 Differential Increase
• Increase in crude oil price with associated product value impacts is primary driver behind light-heavy crude oil price differentials in 2004
• U.S. data support economic choice to use more heavy crude oil as product values shifted– Refiners with upgrading used more heavy sour crude oil
and moved to slightly heavier crude oil mix overall– Yet yields not affected much
• World data do not support refinery constraints with associated desire for light crude oil theory– Residual yields not noticeably affected– Stocks implied no insurmountable supply of residual
fuel oil
QuestionsQuestions
• What drove crude prices up in 2004?• What caused the light-heavy crude price
differences to change in the short run?• What role did refinery capacity and heavy
crude oil production play in 2004 light-heavy crude oil price differentials?
• Are higher refinery margins going to continue in the future & what lies ahead for refinery capacity?
Margins & What Lies AheadMargins & What Lies Ahead
• 2004 margins up – but for how long?
• Future implications for refinery capacity
Margin’s Relationship to Crude PriceMargin’s Relationship to Crude Price
0
5
10
15
20
25
30
35
40
4519
91
1993
1995
1997
1999
2001
2003
$/B
arre
l
WTI
GC 3-2-1 Spread
Annual Average WTI and Gulf Coast 3-2-1 Spread
Source: Annual Average Bloomberg spot prices
Future ImplicationsFuture Implications
Near Term• Crude prices remain
relatively high• Thus, differentials &
margins remain strong
Longer Term• Future S/D uncertainties• Thus differential & margin
uncertainties• Policy uncertainties –
product quality & demand
U.S. Refinery ExpansionU.S. Refinery Expansion
• U.S. refining likely to continue to expand• But U.S. may also need increases in
product imports• Still, short-term financial incentives for
expansion look favorable– Continued short-term market tightness– Product specifications may increase product
import prices
World Capacity ExpansionWorld Capacity Expansion
• While world is not “out of capacity”, there is a need for increases to continue to meet growing demand
• Expansion plans are being announced
• Valid concern over timing of completed expansions versus demand growth – both in U.S. and abroad
Upgrading Capacity Expansion Upgrading Capacity Expansion PotentialPotential
• US upgrading capacity expansion– Expanded more than in other parts of the world– Generally done in partnership with heavy crude producers– Still room for some more
• Asia upgrading capacity expansion– Perhaps next major expansion area – Required to meet growing light product demand– Partnerships with Middle East?
• Europe upgrading capacity expansion– Demand not growing strongly– Demand/refinery output mismatch– Need to destroy residual fuel (demand declining)
Conclusion 1 Conclusion 1 Crude Oil Price was Prime Crude Oil Price was Prime
Mover in 2004Mover in 2004
Crude
Margins
Differentials
Conclusion 2Conclusion 2
• Refinery capacity’s role in 2004 price dynamics was sometimes overstated, but new capacity is needed.
• Beware of over-simplifications that indicate crude oil-refinery mismatches are creating serious market bottlenecks.
• Margins and differentials should favor expansion in the short run.
• Expansion needs to be sooner rather than later, with U.S. dialogue balancing competing concerns of security, environment, and supply availability.