The implications of increased refining margins

I like a good sitcom as much as anybody, but I get a little ticked off when the good ‘ole laugh track is instantly triggered even when something isn’t that funny. It is to be noted that the Iranians resisted the laugh track when the nuclear deal was announced, relying on real live hysterical chuckles and giggles that must still be echoing in the ears of John Kerry and the five other world powers. Pick your crayon and colour to your liking, but let’s face it they spent 19 months humming, hawing, and photo-opping only to cave in to the plutonium glare of the Iranians.

Little, if nothing in the deal eliminates Iran’s ability to become a threshold nuclear power, which I thought was the point of the mind game, but it seems they’ve just reset the reality clock to a later date. The release of $150 billion of locked up funds will now be available to the terrorist flavour of the month. And, oh yeah, don’t look now but here comes another 900,000 bpd of light sweet crude into a market that is already oversupplied by 2.5 million bpd.

“The more the merrier,” say the consumers at the rack and street level pumps. Crude prices will drop ‘dontcha know, and so will diesel prices ‘dontcha double know! Not necessarily so.

 The additional Iranian crude will not hit the markets for several months, if not a year from now, but that doesn’t matter because speculators make the call on an “if and when” basis and the “if and when” in their minds is now.

Yes this has, and will continue to lower WTI (Western Texas Intermediate) and WCS (Western Canadian Select) prices, which means the oil sands and shale oil operating costs will merge closer to crude costs so rig activity and investment will fade to indifference. With WTI about to descend into the murky depth below $50/bbl, those integrated oil companies with both an upstream and downstream – which in Canada is Esso, Shell and Suncor – are now actively forcing the consumer to pull their profit wagon, as upstream (exploration and production) has literally run out of financial steam. The way this is being accomplished is by increased refining margins or the difference between the cost of crude and the rack or wholesale price.

You want proof?

Using year ago crude exchange rates and rack prices with the same data in effect today, the following are the percent changes in refining margins:

Vancouver, +38% | Calgary, -15% | Winnipeg, -10% | Toronto, +46% | Montreal, +50% and Halifax, +12%

This is just for diesel and diesel is not the price driver in the summer because this is the gasoline season, so let’s look at the same data for gasoline.

Wait for it… On a national average, the refining margins are up an astounding 126% over last year.

Diesel consumers be forewarned! When the driving season ends on Labour Day, the high demand diesel season begins. The oil companies will then replace gasoline with diesel as the power horse in their profit engine. Although you may see crude near $45/bbl this fall, don’t transfer this to lower racks because the refining margins will be jacked up to cover the lower crude costs and protect upstream viability.

The Iranian nuclear deal just reset the fuse to delay, as are the current diesel rack prices. So stand back or you may get burned.

 No laugh track will help here because it just isn’t going to be funny.

~The Grouch



Roger McKnight

Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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  • We always hear the rumblings and frustrations that the “big oil old boys club” do dirty, nasty things to the end-consumer. It’s good to see someone call them on it.

    Will it change anything (is there really anything we can do)? Probably not, but at least it’s out there and people will be more aware of it.

    Kudos on an insightful article that hits the nail on the head!

    David E Boudreau, MBA
    MAKE Business Improvements – President