Written by Ed Burke | May 14, 2012 8:15:00 PM

The April 2012 Issue of Oil & Energy Magazine features an article by yours truly on the East Coast refinery closures, and what expected future impact may be. You can read the full article here: Oil & Energy Magazine (or if you prefer, open it as a PDF by clicking here )

Factoring into the closures, and the soon-to-be resultant price increases is the Northeast's traditional import of Brent crude vs WTI. Historically, Brent and WTI have traded fairly close, so the price impact at the refinery level was essentially equivalent. However, due to geopolitical and other factors, the crack spread on Brent vs WTI has been trending wide, as shown by these real time tickers:

Lets put it in actual dollars - as of May 2nd, WTI is trading around 105ish, Brent 118ish... to figure out what that equates to in dollars per gallon (what refiners work on) we look at the crack spread. The crack is essentially “what do I get per gallon for every barrel coming in?”

So how do you know the crack spread? You calculate it this way:

($ per barrel/ 42 (gal per barrel)= X).. you then take current trading price of HO (~3.14) and subtract X. Then you multiply by 42 to get gain or loss per barrel.

($ per barrel/42 gal per barrel= X)

(Current HO trading $ - X)*42 = gain/loss per barrel

Refiners will say they need at least a $5 crack to operate. To put it in real numbers, the current WTI crack is around $26.88 a barrel; the current Brent crack is around $13.88. Here’s how we get that:

WTI= $105/42g=2.50 base cost for crude to make HO at refinery

JUN HO= ~3.14

Equates to = .64 margin on current economic conditions (3.2018-2.5238=.64)

Multiply that by 42 gallons per barrel and you get $26.88 profit for every barrel of HO produced from WTI crude.

Do the same math for Brent:

Brent = $118/42=2.8095

JUN HO= ~3.14

(3.2018-2.976=.3305 x 42= $13.881 per barrel)

[Interestingly, the same math on these two products in April yielded a WTI crack spread of $28 to Brent's $9.50. (JP Morgan has predicted that the spread will drop further, before widening to new records as reported in the Economic Times Here )]

Which product would YOU rather have access to?

There is a massive push to not only improve the pipeline system in the US but the rail system as well, in order to take advantage of this crack spread. If you’re a northeast refiner and have access to WTI, you have a huge advantage vs. your competitor in the Northeast because they’re based on Brent.