By OGJ editors
HOUSTON, Aug. 11 -- US refining margins are falling despite rising West Texas Intermediate crude oil prices because seasonal inventory levels drive the relationship between the two, noted Jacques Rousseau, an analyst with Friedman, Billings, Ramsey & Co. Inc.
A quarterly historical correlation between West Texas Intermediate crude oil prices and Gulf Coast refining margins shows the strongest relationship in the first and fourth quarter. The correlation between the two weakens during the summer.
"We believe that inventory changes drive this correlation pattern, and in periods of falling inventory levels (typically 1Q and 4Q), changes in crude oil prices are reflected in refining margins quickly, while in periods of rising inventory levels (historically 2Q and 3Q), there may be ample supply to prevent a pass-through of prices."
During July, total refined-product inventory levels increased by 12.3 million barrels or 3.1%, he said, adding that the average US refining margin declined 21% for the same period and another 10% during August as of Aug. 4. That compared with a 19% rise in crude oil prices.
"Using this theory, if inventories continue to rise, which we expect during the seasonally weak month of September (when production remains strong while gasoline demand slows at the end of the summer driving season), refining margins could decline further, even if crude oil prices do not," Rousseau said.
Fears of a summer gasoline shortage have continued subsiding with the arrival of August, he noted. FBR's average US refining margin has declined 31% for the third quarter as of Aug. 4 and could decrease more, Rousseau said.
