August 31, 2018North American independent refiners posted strong financial results in the second quarter, building on gains notched in the earlier three-month period. Major contributors to strong margins include growing discounts for local crude and stronger than usual diesel markets.

Continued supply growth in the Permian Basin and Western Canada, coupled with logistical bottlenecks in both areas, have lowered the price of feedstock crude oil. Growing volumes are overwhelming the capacity to move crude to the market on pipelines, as we discussed in this article. This has particularly benefited the inland refiners of the Midwest and mountain states, adding $5-10/barrel to reported gross margins relative to the same period a year earlier.

Overall US finished product demand was up 1.2% in April and May 2018 compared to the same months in 2017. Total product demand growth was propelled mostly by rising diesel demand, which was up 8.5% (over 300,000 barrels per day) in April and May 2018 compared to the previous year. Surging demand for diesel stems from increased trucking activity in response to commercial and industrial demand. Fortunately for refiners, strong diesel demand has more than offset lackluster demand for gasoline, which did not see its usual summer spike this year. We discuss this topic further in this recent blog post.

Strong demand was enough to push margins in coastal markets up $2-4/bbl compared to the previous year, even without the benefit from crude discounts. In the second quarter, cracking margins for light crude were higher by $2.30/bbl, while those margins for imported sour barrels rose $1.80/bbl compared to the year-earlier period. Cracking margins for heavy crudes improved by $4.80/bbl and coking margins for heavy crudes improved $5.60/bbl compared to the second quarter of 2017.