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The Productivity Problem In The Permian

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Cheaper Texas Oil Makes Smaller Refiners Top Performers

Oil train

A shortage of pipeline capacity depressing the price of Texas crude coupled with rising gasoline demand has served to turn small independent refiners into top performers in the sector, outshining larger downstream operators.

According to a Reuters report, investors are flocking to independent refiners with less complex refineries whose primary feedstock is the light, sweet crude that is pumped in Texas. Unlike them, large refiners’ facilities also need heavier, sour oil to process, so the effect of the shale revolution on them has been more limited.

Crude oil production in Texas has been rising fast lately and pipelines are full, which is prompting a discount for Texas crude. Independent refiners are wasting no time to take advantage of this discount: Midland, Texas crude is now trading at a three-year low, while sour, heavier grades are rising because of the OPEC production cuts.

All this has been made possible by the fact that smaller independent refiners have simpler facilities, which can only process lighter grades—larger refiners cannot just switch from heavy oil to light local blends. Furthermore, because of the need to add heavy crude to their processing blend, larger refiners are dependent on imports, some from Latin America, while smaller independents only rely on local supply.

As a result, Reuters’ Devika Krishna Kumar writes, investors are now eagerly expecting their small refiners to report much stronger Q1 figures than larger downstream companies. Over the last three months, the top share price performer among small independents has been Delek US Holdings, which shot up by 30 percent, followed by HollyFrontier Corp., which gained 25 percent over the period.

Still, even larger refiners are going to report strong figures, according to observers, thanks to higher gasoline demand in the United States that has driven refining margins to the highest in five months and thanks to the discount of Canadian heavy crude—the main heavy crude for U.S. independents.

By Irina Slav for Oilprice.com

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