July 3 U.S. refiners in the Midwest are losing an advantage they have enjoyed for nearly three years as the gap between the world's two most-traded crude oil grades falls to its lowest in about two-and-half years.
The premium of North Sea Brent to U.S. benchmark West Texas Intermediate (WTI) dwindled to $3.09 on Wednesday, its narrowest since December 2010.
That premium was at about $20 for most of 2012, boosting margins at inland refiners such as CVR Energy Inc, Marathon Petroleum Corp, Western Refining Inc and HollyFrontier Corp.
The companies' margins burgeoned as they purchased low-cost WTI and sold refined products, such as gasoline and diesel, at prices linked to the more expensive European Benchmark Brent.
"The Brent-WTI spread will remain subdued in the second half of 2013, which could certainly provide a headwind for a group that has largely relied on it for margin and earnings momentum," said Raymond James analyst Stacey Hudson.
Shrinking crude differentials, among other factors, would affect near-term profitability and influence capital investment decisions, HollyFrontier Chief Executive Mike Jennings said on a conference call with analysts in May.
Since May 1, HollyFrontier's shares have fallen 16 percent, while Western Refining has dropped 13 percent. CVR is down 8 percent and Marathon Petroleum has fallen 6 percent in the past two months.
"I'm telling people now to stay away from these stocks (inland U.S. refiners), until we know in the next 3-4 weeks whether this trend is temporary or it's going to take a long long time before it reverses," said Oppenheimer & Co analyst Fadel Gheit.
Bradley Olsen, analyst at investment bank Tudor Pickering & Co, said he believed the rally in WTI prices would be relatively short-lived, with prices unlikely to remain strong through the rest of the year.
U.S. crude futures have risen 7 percent to $99.60 per barrel so far this year, with improved pipeline and rail capacity easing the glut at America's oil-storage hub at Cushing, Oklahoma.
Brent crude futures, meanwhile, have fallen 8 percent to $104 a barrel in 2013 as North Sea oilfields return to production and Saudi Arabia increases oil output.
Demand for Brent-quality crude in the United States has declined as imports have been displaced by a rise in U.S. light sweet crude production, the U.S. Energy
The narrowing differential between WTI and Brent also means that Light Louisiana Sweet (LLS), the benchmark light crude on the Gulf Coast, will move closer in price to WTI.
"We expect to see LLS, which had been linked to Brent, move closer to WTI as less and less foreign light crude is imported into Gulf Coast refineries," said Bill Day, spokesman for Valero Energy Corp, which stopped importing foreign light sweet crude at the end of last year.
Valero's stock has fallen about 5 percent since May 1.