Summer Offers Refiners No Relief -- WSJ

By Alison Sider 

Oil companies counted on American drivers hitting the road this summer to reduce the glut of fuel in storage, but that hasn't happened, and a continuing buildup portends dismal second-quarter earnings due out soon.

Since crude prices plunged in 2014, giants like Exxon Mobil Corp. and Chevron Corp. have leaned hard on their refining operations to prop up declining profits from pumping oil. Those margins helped stand-alone refiners like Valero Energy Corp. and Marathon Petroleum Corp. emerge as bright spots in a dour energy industry.

But turning crude into fuel has become less lucrative lately: weaker refining margins slammed the independents' first-quarter profits and hurt big oil companies' refining arms. The second quarter appears just as bleak.

Summer is typically when people drive the most, boosting refiners' profit. But during the recent quarter, refiners were hit by rising crude oil prices. They also wound up paying more for ethanol credits they need to buy to comply with a federal mandate, which Tudor, Pickering, Holt & Co. analysts predicted will slim second-quarter profits.

"Optimism for a good summer performance is rapidly evaporating," Roger Read, a refining analyst at Wells Fargo & Co., wrote earlier this month.

It may get worse before it gets better. Projections for refiners' third-quarter earnings may have to be revised down by 35% to 40%, Deutsche Bank analysts said.

To be sure, refiners are still making money, and their margins have improved since the first quarter. At today's benchmark prices, the crack spread, or price difference between crude oil and gasoline, stood recently at between $12 and $13 a barrel.

But while those margins are nothing to sneeze at, last year's gasoline margins were nearly $17 higher, according to an Energy Management Institute report.

Much of the trouble centers on gasoline. In conference calls in April, refining executives were upbeat, anticipating that drivers would hit the road in record numbers this year.

That largely came true. Although some gasoline demand figures have come in weaker than expected, the U.S. Energy Information Administration is still predicting that U.S. drivers will break the 2007 record for gasoline consumption. But it hasn't been enough to fix the fuels glut.

"Demand has actually been quite strong. It's just that supply has exceeded it," said Mark Broadbent, a research analyst at Wood Mackenzie, a U.K.-based consultancy.

Refiners produced a big overhang of gasoline earlier this year and still haven't been able to work through it. There are more than 241 million barrels of gasoline sitting in storage tanks, close to 25 million more than at this time last year. And while export markets have historically provided a relief valve for surplus fuel, this glut isn't confined to the U.S.

Many experts expect refiners will have to throttle back production and stop buying so much crude if their margins keep getting squeezed. Some East Coast refiners have already taken that step.

Further cuts could weigh on oil prices. Already, West Texas Intermediate, the U.S. benchmark, has started to slide, closing on Friday at $44.19 a barrel, the lowest price since May.

"With such low operating margin and high gasoline inventories, we could see economic run cuts, unusual for this time of the year," Wolfe Research analysts wrote earlier this month. "Nothing will break our love of summer, but this one, it passed us by."

Write to Alison Sider at [e-mail]

(END) Dow Jones Newswires

July 25, 2016 02:48 ET (06:48 GMT)

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