Have Mars and Light Louisiana Sweet crudes become marginalized after failing to rise with a wide Brent-WTI spread?
In the past week, with the ICE Brent-NYMEX WTI spread blowing out—it was at parity briefly a few weeks ago, and now it’s out to more than $11–US Gulf Coast crudes Mars and LLS’s differentials failed to rise in tandem. In the past, whenever the Brent-WTI spread widened, Mars and LLS differentials to WTI would rise, in essence, keeping those two grades more in line with Brent.
Since the beginning of October, the Brent-WTI spread has widened from about $5.90/b with a peak gap of $11.65/b October 22 before retracing back to $10.81/b October 28.
Mars on Monday was at WTI minus $3.20/b while LLS was at WTI plus $2.10/b, Platts data showed. When the Brent-WTI spread was $11.68/b in April—not that far from where it is now– Mars was trading at $8.95/b more than WTI and LLS was plus $14.40/b, according to Platts data.
So the two key US grades are significantly weaker relative to WTI than they were in the spring. And since the relative value of Brent and WTI are about the same now as they were in April, that means that the crudes are weaker relative to Brent than they were in April also.
Why have Mars and LLS failed to keep pace with the changes in the Brent-WTI structure if they are supposed to represent the imported values for medium-sour and light-sweet crudes? Traders say refinery turnarounds in the Gulf Coast have kept a lid on Mars and LLS’s differentials.
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But even when Gulf Coast refiners undertook turnarounds in February, when the Brent-WTI spread was at $20.75/b, Mars was trading at $15.10/b premium to WTI and LLS at $20.75/b over WTI, according to Platts data (February 14 basis).
Why are Mars and LLS looking like they are no longer the reference point for sour and light sweet Gulf Coast crudes? Have these two reference points become marginalized?
Mars’ value, according to industry sources, depends to a large extent how well Motiva’s Port Arthur refinery is operating, as well as the demand for medium sour crudes in the Gulf Coast. As far as Port Arthur, bedeviled by a series of issues for months, Platts’ Janet McGurty summed it up in an article several months ago that declared: “The woes that have beset the expansion of Motiva’s refinery in Port Arthur, Texas, have people wondering how it could all go so wrong for a group of companies with so much expertise.”
LLS, which like Mars is comprised of various streams, has largely become Louisiana-based crude since the reversal of Shell’s Houma to Houston pipeline. This pipeline currently runs from Houston to Nederland, thereby making LLS uneconomical to move to Houston and Nederland refiners. It costs roughly $2.00-2.50/b to barge LLS to Houston or Nederland.
Increased take-away capacity from the Eagle Ford Shale area into Corpus Christi and into Houston has worked against LLS, industry sources noted. “Eagle Ford shale crude is a cost advantaged crude and as the Brent-WTI spread widens, it favors refiners to look at Eagle Ford and Bakken rather than LLS,” said a Gulf Coast refiner.
With Mars and LLS not living up to expectations, as witnessed by recent developments, this works to the advantage of refiners who import sour crudes from the Persian Gulf. Crudes imported from Saudi Arabia, Iraq and Kuwait are priced off the Argus Sour Crude Index, in which Mars’ transactions account for 70% of the index.
“So long as Mars fails to keep pace with the Brent-WTI spread, US refiners will hike their imports from the Persian Gulf countries,” added another refiner. “This could be one reason why Saudi imports have remained between 1.3-1.4 million b/d.” Looking at Saudi import figures, it is striking how so many other nations have taken a hit on their exports to the US, but the Saudis have been remarkably consistent.