Refining Margins Squeezed as WTI Prices Surge Ahead of Gasoline

Strategic Insights -

Prices for West Texas Intermediate (WTI) and other crude oils rose sharply on June 8, 1994, as trading indicated a significant strength in the value of crude oil compared to gasoline, further cutting refining margins. In this environment, the squeeze on refining margins intensified as domestic crude oils rose in value, while gasoline prices lagged behind. The relative strength of crude oil reflected a decrease in crude oil stocks last week against an increase in gasoline inventories.

Key Takeaways:

  • WTI futures for July delivery rose 59 cents to $18.34/bbl, while North Sea Brent futures for July delivery were up 30 cents to $16.24/bbl on June 8, 1994.
  • July gasoline futures gains were only 0.46 cents, closing at 51.81 cents per gallon, as wholesale gasoline prices fell to 57.09 cents per gallon.
  • Natural gas futures continued to rise, surging above $2/MMBtu, driven in part by an apparent late surge of nonoil-related buying by commodity funds and financial institutions.
  • The relative strength of crude oil compared with gasoline also reflected a drawdown of crude oil stocks last week against a rise in gasoline inventories.
  • Leading buyers of U.S. crudes cut postings 25 cents/bbl, lowering term contract WTI to $16.50, suggesting a short-lived reversal of futures prices.
  • July North Sea Brent crude futures rose 30 cents to $16.24/bbl on London's International Petroleum Exchange, widening the WTI-Brent spread to $2.10/bbl, ensuring a continued heavy flow of North Sea, African, and Russian crudes to the United States.
  • The discount on Russian Urals below Dated Brent widened to 75 cents.
  • The 3-2-1 crack spread, a key indicator of refining profitability, plunged to $2.69/bbl, its all-time low.
  • Unocal Corp.'s Wilmington, California, refinery lost power to a catalytic cracker due to a raccoon that shorted out a high-tension pole, impacting production.
  • Wholesale gasoline prices plummeted, with unleaded regular gasoline falling to 57.09 cents/gallon and low-sulfur diesel dropping to 51.38 cents/gallon.
  • July natural gas futures rose 6.5 cents to $2.087/MMBtu.

Statistics:

  • WTI futures price: $18.34/bbl (Jun 8, 1994)
  • North Sea Brent futures price: $16.24/bbl (Jun 8, 1994)
  • July gasoline futures gain: 0.46 cents/gallon
  • Wholesale gasoline price: 57.09 cents/gallon (Jun 8, 1994)
  • July natural gas futures price: $2.087/MMBtu
  • 3-2-1 crack spread: $2.69/bbl
  • Unleaded regular gasoline futures price: 51.81 cents/gallon
  • Wholesale unleaded regular gasoline price: 57.09 cents/gallon

Sources:

  • "Refining margins squeezed as WTI prices surge ahead of gasoline," Platts, June 8, 1994
  • "WTI futures price slips after initial surge," Platt's Oilgram News, June 8, 1994
  • "Natural Gas Futures Rise Sharply Above $2/MMBtu," Platt's Oilgram News, June 8, 1994