US refining profit poised to rebound from 2Q dip

Market: Crude oil, Oil products
23/08/23

Narrower crack spreads in the second quarter reduced earnings for every major US refiner, but results are set to improve in the back half of the year on widening crude quality differentials and planned maintenance.

Every major US refiner — and the refining segments of integrated energy companies — posted a drop in second-quarter earnings from a year earlier (see chart). The decline was driven by narrower margins that moderated from near-record highs a year earlier, when demand surged as the US recovered from the the Covid-19 pandemic and as the war in Ukraine rerouted refined product flows to Europe, depleting stateside inventories.

Fears of a looming recession and weaker demand in the second quarter narrowed crack spreads, a measure of refining profitability, independent refiner CVR said, while Phillips 66 noted more expensive crude contributed to the profit decline.

For refiners geared to process heavier crude grades — such as LyondellBasell, Marathon, Valero and Phillips 66 — a narrower spread between heavy and light oil grades increased refinery feedstock costs and left less room to capture profits.

Planned maintenance and unplanned outages also narrowed second-quarter margins at refiners such as HF Sinclair, whose throughputs were down by 12pc from the second quarter of 2022, and at Marathon Petroleum, whose throughputs in the quarter were cut by 2.5mn bl following a fatal 15 May fire at the 593,000 b/d Galveston Bay, Texas, refinery. The damaged unit is expected to be down through September.

Still, US refining margins remain well above historical levels for this point in the economic cycle, and heavy-light crude spreads are set to widen as the industry heads into a busy maintenance season, PBF chairman Tom Nimbley said.

"We believe crude markets are near the peak of narrowness," Nimbley said on an earnings call.

Increased heavy crude production in western Canada and Venezuela will contribute to a wider US spread as an influx of supply lowers the cost of heavier grades, Valero chief operating officer Gary Simmons said in July. Marathon also made the case for a widening heavy-light spread during an August earnings call.

On the demand side, companies indicated that refined products consumption remains strong.

Valero's quarterly gasoline sales were up 22pc from pre-pandemic levels and set a sales volume record of over 1mn b/d in May and June, driven by as much as 1mn b/d of US refining capacity that has come offline since 2019 and inventories that are at the low end of five-year averages.

"The strength in US products basically starts with low inventories," Phillips 66 vice-president Brian Mandell said on an earnings call this month.

Refined product revenues at Chevron were up by 7pc from the second quarter of 2022 and Phillips 66 reported a 4pc rise in gasoline sales volumes while its US distillates sales volumes were up 2pc on the year. Diesel demand is likely stronger than the Energy Information Administration (EIA) has been reporting, Valero said.

Turnarounds abound

Combined with strong demand and low inventories, a heavy maintenance season in the second half of 2023 could widen refining margins.

BP's 435,000 b/d Whiting, Indiana, refinery moved up a planned September turnaround to August, while up to 500,000 b/d of throughputs could be offline on the Atlantic coast as Irving Oil and Monroe Energy begin facility maintenance in mid-September.

In addition, HF Sinclair has 185,000 b/d of production capacity undergoing turnarounds in the second half of the year. PBF is planning a fourth-quarter turnaround at its 160,000 b/d refinery in Torrance, California, and LyondellBasell plans work on its 264,000 b/d Houston, Texas, refinery's fluid catalytic cracking unit in the same quarter.

Turnarounds could pull inventories lower, lift refined product prices and widen refining margins, but there is some capacity returning to the US refining market that may mitigate the effect of facilities going offline for maintenance.

Fire-damaged Cenovus refineries in Ohio and Wisconsin totaling about 211,000 b/d of throughputs began restarting in the second quarter. CVR expected to restart a damaged hydrotreater this month at its 75,000 b/d Wynnewood, Oklahoma, plant and Calcasieu plans to restart its 136,000 b/d Lake Charles, Louisiana refinery by September.

And despite record-breaking heat in the US refining heartland, refiners appear to be maintaining typical utilization rates, which could boost depleted inventories as peak summer driving season ends and demand slows.

Still, the US National Oceanic and Atmospheric Administration (NOAA) has upped its expectations for an above-normal Atlantic hurricane season, projecting 14-21 named storms from June to November.

A high-impact hurricane that takes 80pc of Gulf coast refining capacity offline could spike retail prices by up to 30¢/USG, according to a recent EIA report. While crack spreads would likely widen in a weather event of that magnitude, heavily-curtailed refining operations would leave fewer refiners to take advantage of the wider margins.

By Nathan Risser

Change in US refiner earnings from 2Q22 to 2Q23

US refining crack spreads from 2Q22 to 2Q23 $/bl

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