U.S. oil refiners may be able to profit from relatively cheap crude for much longer than many investors anticipate, according to Paul Sankey, an analyst at Deutsche Bank AG.
As the CHART OF THE DAY illustrates, the difference in price between benchmark U.S. and European crude for immediate delivery has more than quadrupled this year, to $18.10 a barrel. The move has taken place as supplies have piled up in Cushing, Oklahoma, where oil is delivered under futures contracts.
“This differential is likely to remain very wide for the coming years,” Sankey wrote two days ago in a report. He cited the likelihood that oil production in the Mid-Continent region, spanning North Dakota to north Texas, and Canada will increase more than enough to exceed pipeline capacity through 2020.
Refinery earnings have risen this year as the gap has widened. The chart shows the potential profit from processing three barrels of oil from Cushing into two barrels of gasoline and one barrel of heating oil in the Gulf Coast region. The so- called crack spread has more than doubled to $21.47 a barrel.
Spreads may widen even more later in the year, Sankey wrote, as the U.S. hurricane season unfolds and lower prices spur demand for gasoline. Hurricanes typically hit the Atlantic between June and November. Gasoline futures have lost 14 percent in New York trading since the end of April.
The outlook prompted Sankey to raise his investment rating on Western Refining Inc. (WNR), based in El Paso, Texas, to “buy” from “hold.” He also recommended buying Marathon Oil Corp. (MRO), a Houston-based company which will spin off its refining and marketing business next week, and CVR Energy Inc. (CVI), based in Sugar Land, Texas.
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