JP Morgan analysts say simple refining margins to improve on more complex global capacity

J.P. Morgan analysts said that the increasing complexity of the global refining system has reduced the supply of several straight-run products including fuel oil and vacuum gasoil. As a result, the difference between simple and complex refining margins has narrowed to unusual levels.
In September, simple refining margins on Brent averaged US$8 a barrel, only US$1 below complex margins. This, according to the analysts, is a sign that a tight Atlantic Basin product market is changing the traditional relationship between hydroskimming, also known as simple refining, and cracking, or complex refining.
Simple refining margins averaged minus US$0.37 cents a barrel between 1995 and 2012, compared with catalytic cracking margins of US$2.51 a barrel. According to the analysts, “Hydroskimming margins have accounted for the majority of the profitability across various refinery configurations for most of the past two years.”
Complex refining capacity is expected to rise through this year and 2013. Analysts estimate that global coking capacity this year will expand by 435,000 barrels a day, and by another 475,000 barrels a day in 2013. Forecasts also predict that hydrocracking and catalytic cracking capacity will increase by 670,000 barrels a day this year and by 730,000 barrels a day in 2013, which will further squeeze the supply of straight-run products.
“These trends will continue to support differentials for straight-run products to crude, a change from their traditional wide discount,” said J.P. Morgan’s analysts. Additionally, the analysts said that in the near term, an increase in refinery runs in the Atlantic Basin in late October will most likely ease the tight supply situation. (October 1, 2012)