U.S. refining margins set to fall from last year's all-time high
2023/7/27
Refiners have experienced a wave of favorable pricing and strong demand after pandemic-era plant closures and geopolitical conflict boosted margins. Slowing economic activity and rising global refining capacity have pulled the market back from last year's highs.
TD Cowen analyst Jason Gabelman said revenue is by no means weak, but it should be more normal.
OPEC+ cuts in oil output in the second quarter allowed U.S. refiners to buy heavy, sour crude off the market cheaply to generate higher margins from fuel sales.
That also eased earlier this year when refiners were able to sell jet fuel at a much higher price than diesel because of a winter distillate shortage. Crude oil spreads and premiums for jet fuel over diesel are back near historic levels, Gabelman said.
There are also problems with large fuel production units at refiners such as Marathon and Phillips 66 at key facilities in Texas and New Jersey, preventing them from realizing their full potential profits.
According to data from refining intelligence company IIR Energy, in June 2023, unplanned outages averaged close to 550,000 barrels per day, compared with nearly 290,000 barrels per day in June 2022.
Valero Energy, the second-largest U.S. refiner by capacity, reports earnings on Thursday, with earnings per share more than halving to $5.07 from $11.36 a year earlier, according to the average estimate of 17 analysts polled by Refinitiv. Dollar.
Marathon Petroleum, the largest U.S. refiner, is expected to earn $4.60 a share, compared with $10.61 a year ago, while Phillips 66 earned $3.58 a share, compared with $6.77 a year ago, according to Refinitiv data. Both companies are scheduled to report earnings in early August.
Earlier this month, Exxon said refining margins also slashed $2.1 billion from the operating performance of its gasoline and diesel businesses.
Going forward, refiners stand to benefit from persistently high crack spreads, which are currently hovering around $37.50 a barrel, according to Refinitiv data. Crack spreads are an indicator of refining margins.
But Gabelman said refiners could face challenges as new refining capacity comes on stream in Asia and the Middle East, as well as weak diesel demand due to a slowdown in truck and freight markets. And added, "not much confidence in the outlook".
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