Schork Oil Outlook: Brother Can You Spare a Dime? Refiners Need Help.

In 2006 we saw poor refinery performance as strong concurrent hurricane seasons delayed maintenance in the spring of 2005 and 2006. At the start of the year refinery throughput was 3% lower than the preceding year and traders feared a shortage in capacity which led to product prices decoupling from the complex and rising sharply.

In turn, refiners saw their return at the pump rise from $0.223 a gallon in February to $0.784 by July as this fear was priced into the season. That’s a 351% increase in five months while crude oil prices rose by just 16% over the same period.

Of course, the cure for high prices is high prices, and as the refineries came back on-line the market was flooded with products. By the end of the driving season in September, throughput was running 3.9% above the five-year average, but the refiners’ take was back down to $0.161 at the pump.

The fear this year is that we may see a directionally opposite trend play out. In October the refiners’ cut at the pump was estimated at $0.166; a year-to-date low. With margins so low, nobody wants to boil crude oil. As such, in order to survive refiners are taking it upon themselves to improve revenue, i.e. minimize output.

With the sub $0.20 share at the pump, inputs for September (the latest monthly data available) averaged 2.6% below the 2003-07 time-step. Preliminary results for November are even worse; inputs averaged just 14.1 MMbbl/d, 9.5% below the 2003-07 time-step.

Furthermore, the current 321 crack spread on the NYMEX lends credence to an impending shortfall. In this vein, at which price point will refiners be enticed to start pushing crude oil through their units?

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If we go back to the 2006-07 time-step, we saw correlation between prices and inputs drop close to 0 as refiners’ share of the pump dropped below $0.20. Regardless of the price, inputs were not responding in kind. It wasn’t until margins rose above $0.60 that we saw correlation recover to large positive values.

In 2009 correlation has similarly dropped from an average of 0.73 in summer, when the refiners’ cut at the pump was $0.380, to an average correlation of -0.06 in Q3 2009 as their cut dropped below $0.20. Moving forward with preliminary input levels for November and December, we would require refiner’s share to rise above the $0.20 mark in Q1 2009 before inputs begin to rise by a commensurate level.

Bottom line, if refiners are going to make money in 2010, then product prices, relative to crude oil, must rise.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.