Price Swings in ULSD, RBOB Futures to Squeeze Margins


   
Barani Krishnan
DTN Refined Fuels Market Reporter

   SECAUCUS, NJ (DTN) -- U.S. refining margins are likely to be squeezed if 
extreme volatility in NYMEX ULSD and RBOB futures becomes normalized with 
minute-by-minute turns in the Iran war.

   Sharp double-digit declines in refined product futures, such as those seen 
on Monday (3/23), could particularly put refiners in the West Coast, or PADD 5, 
under pressure as the cost of heavy crude remains buoyed by the ongoing supply 
blockade caused by the war.

   ULSD futures for April delivery finished down Monday's trade down $0.5524 at 
$4.0560 gallon, after a session low of $4.0049 and high of $4.8353.

   The NYMEX RBOB gasoline contract for April closed down $0.3113 at $2.9749 
gallon. The intraday low was $2.8972 versus high of $3.4079.

   Crude prices also tumbled after swinging on the day. NYMEX WTI for April 
settled at $88.13 bbl, down about $10, after an intraday swing of $17. Brent, 
which decides pricing for imported crude, fell more than $12 on the day, after 
a swing of over $18, to $99.94.

   While the outsized drop in crude futures should theoretically balance out 
Monday's 55cts drop in ULSD and 31cts slide in gasoline, real market conditions 
can exacerbate refiners' dilemma, owing to timing lags and grade differentials.

   This is because refiners are now processing crude purchased weeks ago when 
Brent was steady at around $100/bbl. When refined product futures -- ULSD or 
RBOB -- tumble intensely following turn-by-turn developments on the Iran war, 
the refiner sells finished fuel at prompt lower prices while paying off 
expensive inventory currently in their system. This creates an immediate 
cash-flow squeeze that a one-day drop in crude futures cannot fix.

   While WTI fell to around $88 bbl on Monday, the heavy grades required by 
PADD 5 refiners remain relatively sticky or expensive because of the Strait of 
Hormuz blockade by Iran that has physically cut off the global supply of heavy 
oil.  Case in point is Brent, which fell $12 on the day but remained close to 
$100 bbl.  Brent is one of the international indicators for heavy crude like 
the Saudi Medium or Saudi Light that West Coast refiners rely on.

   Unlike refiners on the Gulf Coast, or PADD 3, which are supplied by an 
extensive network of domestic pipelines from the Permian and Bakken, the West 
Coast has no such infrastructure crossing the Rockies. If PADD 5 loses seaborne 
imports from the Middle East, it cannot simply turn a valve to bring in more 
Texas crude.

   While the U.S. is a net exporter of oil, California itself remains a massive 
net importer. Persian Gulf imports concentrate largely in PADD 5 because 
California refiners lack the pipeline connectivity of the PADD 3. Daily price 
swings from the Iran war will disproportionately impact refiners in the West 
Coast more than any other U.S. region.




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