Mid-Continent primary processing utilization at monitored refineries remained at 100 percent between weeks ending November 23 and December 14, following the most impactful fall maintenance season in recent years. Refinery maintenance in fall 2018 exceeded initial estimates and its effect on crude demand was reflected in regional storage inventories and pipeline activity during the turnaround season.
Mid-Continent Refineries Dipped to Lowest Utilization Rates Since 2015
Genscape monitors 97 percent of PADD 2 refineries by capacity. Primary processing equipment, including crude distillation (CDU) and vacuum distillation (VDU) units, were the predominant focus of maintenance projects in PADD 2 this season. Our North American Refinery Intelligence Service showed maintenance peaked week ending October 26, when monitored primary processing utilization reached a low of 82.4 percent, the lowest level since October 2015. In fact, utilization remained below 88 percent, the fall 2017 low, for six consecutive weeks between late September and early November 2018. As turnaround projects came to a close, utilization rebounded to 90 percent for the week ending November 9.
Genscape expected primary processing utilization to decrease to a low around 84 percent in October 2018, as noted in our North American Refinery Turnaround Schedule and North American Refinery Runs Forecast, which includes announced turnarounds and predicted turnarounds based on historic observations and refinery runs cycles. Despite the relatively wide price differential between NYMEX Light Sweet Crude (WTI) and Western Canadian Select (WCS) going into the fall, refineries in the Mid-Continent were slated for a stronger turnaround season this year compared to previous years, due to deferred maintenance projects and refinery runs cycles.
The largest and possibly most anticipated turnaround project involved the 250,000 bpd crude section (Pipestill 12) at BP’s 405,0000 bpd Whiting, IN, refinery. Genscape was the first to announce turnaround completion as units restarted on November 12, after nearly eight weeks of planned work. Maintenance lasted one week longer than BP expected. BP originally scheduled the Pipestill 12 works for spring 2018, but delayed maintenance as the WTI/WCS price differential widened. Work was rescheduled to July 2018 and finally to late September 2018.
Clearbrook Bakken Sweet Crude Spot Price Drops Due to Mid-Continent Refinery Maintenance
The heavy PADD 2 fall refinery maintenance schedule can also be credited for the recent decline in Bakken Light Sweet crude prices. October and November Mid-Continent refinery maintenance and a decline in crude runs created a demand bottleneck that trickled its way up to Clearbrook, ND, spot prices. Our PetroRail Report publishes daily Bakken Railhead and Clearbrook spot prices. For the majority of the year, Clearbrook traded at an average -$6/bbl differential to Brent. However, in late September the regional Clearbrook/Brent price differential began to widen. In October, the Clearbrook to Brent differential continued to increase, averaging -$18.28/bbl, while November widened even further to -$25.83/bbl, with a maximum differential of -$29.12/bbl on November 1.
These spot price decreases correspond well to PADD 2 refinery maintenance, as downturns in crude demand decrease regional spot prices. Only a few days after BP’s Whiting refinery returned to full operating capacity, Clearbrook spot prices increased and the Brent differential began to narrow. January spot prices for December 14 settled at $47.01/bbl, or $13.26/bbl below Brent, narrowing the spread $15.86/bbl from its widest point. News of Alberta implementing an 8.7 percent crude production cut starting January 2019 also contributed to Bakken price strength in December.
Refinery Turnaround Hindered Mid-Continent Pipeline Flows
Genscape monitors 91 percent and 82 percent of Cushing, OK, and Patoka, IL, connected pipeline capacity, respectively. Mid-Continent refinery maintenance projects suppressed regional pipeline flow, as demand for barrels from Cushing and Patoka decreased. Our Mid-Continent Pipeline Service showed capacity utilization on pipelines from Cushing to Midwest refineries averaged 66 percent between weeks ending September 28 and October 26, compared to the previous five-week average of 74 percent. Meanwhile, utilization on lines out of Patoka averaged 61 percent between weeks ending September 28 and October 26, compared to the previous five-week average of 66 percent.
Weekly average flow on Holly Energy Partners’ 165,000 bpd Cushing to El Dorado, KS, Osage pipeline dropped 50,000 bpd to 74,000 bpd between weeks ending September 21 and September 28 as maintenance commenced at HollyFrontier’s 135,000 bpd El Dorado refinery. Flow resumed to near pre-outage levels week ending November 2 as maintenance neared completion at the refinery.
Meanwhile, Plains All American shut its125,000 bpd Red River Cushing-to-Longview, TX, pipeline the week ending September 28 during maintenance at Valero’s 88,000 bpd Ardmore, OK, refinery, which was observed September 7 through November 16.
Marathon’s 238,000 bpd Patoka-to-Lima, OH, pipeline decreased to 41,000 bpd in late September as Husky prepared to shut multiple units at their 165,000 bpd Lima refinery. Flow rates returned to above 200,000 bpd week ending October 26, when the maintenance neared completion at the Lima facility.
Barrels Backed into Storage Amid Decreased Demand
Refinery maintenance and subsequently low pipeline flows led to inventory builds at the two largest storage hubs in PADD 2. Stocks in Cushing rose more than 12.5mn bbls to 37.8mn bbls between weeks ending September 14 and November 9, coinciding with the turnaround season, according to our Cushing Crude Oil Storage Report. Meanwhile, our Patoka Crude Oil Storage Report showed that inventories in Patoka climbed more than 2.5mn bbls to 9.2mn bbls between weeks ending September 7 and October 26, placing stocks within 2mn bbls of the record-high level set in April 2016.
After steadily climbing through refinery maintenance season, Cushing inventories posted the first weekly draw in two months week ending November 16. However, the building pattern then resumed, with stocks increasing 4.4mn bbls between weeks ending November 16 and December 14, reaching the highest level since January.
Genscape monitors 100 percent of Cushing-to-Gulf Coast pipeline capacity. Our Gulf Coast Pipeline Service showed that capacity utilization along Cushing-to-Gulf Coast lines averaged 94 percent across the past five weeks, compared to the previous 2018 average of 88 percent. The record-high weekly average of 98 percent took place in mid-December. Recent high utilization rates on Cushing-to-Gulf Coast lines demonstrate that available capacity is limited. Constrained takeaway capacity could cap flows between the key regions and contribute to continued builds at the hub.
However, multiple companies are planning pipeline expansions to accommodate higher flows to the coast. Enterprise is in the process of expanding the Cushing-to-Freeport, TX, Seaway Twin pipeline by 100,000 bpd to 550,000 bpd. Other announced pipeline projects out of Cushing include SemGroup and DCP Midstream’s 300,000 bpd Gladiator pipeline to Houston and Tallgrass’ 800,000 bpd Seahorse pipeline to the Louisiana Gulf Coast.
The WTI front-to-second month contract spread switched into a contango structure in mid-October and remained in that structure as of December 14. The front-month contract closed at a $0.27/bbl discount to the second-month contract on December 14, marking the widest close since October 2017.
If the spread is wide enough to cover the cost of storage, favorable economics typically lead to notable storage builds in Cushing, as market participants store barrels to sell for a profit later. The ask price for storage in Cushing was $0.30/bbl/month, according to a December 11 Tank Tiger report.
Fall 2018 maintenance in the Mid-Continent led to the lowest utilization rates at refineries in recent years. As is typical following a busy fall maintenance, we expect spring 2019 turnarounds to have a much lighter impact. The North American Refinery Turnaround Schedule expects that next season's planned maintenance will affect up to 6 percent of primary processing capacity and will peak between March and April. The schedule suggests that 2019 fall maintenance may rival the 2018 fall maintenance impact, as up to 25 percent of primary processing capacity may be affected by turnarounds that have been announced and predicted by historical runs.
As evidenced by Genscape measurements and observations in fall 2018, Mid-Continent refinery maintenance has a significant impact on pipeline flows and storage volumes at key hubs in the Midwest. Inventory builds, especially in Cushing, contributed to downward pressure on crude prices through October and November.
Although the refinery maintenance which largely caused builds through early November, has since concluded, other factors may lead to continued stockpiling in the Mid-Continent. An emerging contango market may incentivize storage plays, while limited takeaway capacity to the Gulf Coast may hinder barrels from moving downstream.
Genscape will continue monitoring refinery operations, storage inventories, and pipeline flows in the Mid-Continent to provide timely data on the fundamentals driving crude prices. To learn more about our refinery intelligence services and capabilities, please click here.