Yahoo Finance Oil Refining Profits Seen at Two-Year Lows on Gloomy Outlook
(Bloomberg) -- US oil refiners that have been among this year’s strongest S&P 500 performers are headed for a reckoning with a darkening supply-and-demand outlook.
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Marathon Petroleum Corp., Phillips 66 and Valero Energy Corp. are set to report their weakest quarterly profits in two years starting this week. For Marathon, the pain is expected to linger as the biggest independent US refiner by market value braces for a second consecutive year of declining sales — the first time that will have happened in almost a decade.
Refining stocks started the year with a bang as a convergence of fuel-supply threats from the Red Sea to Russia and the US Great Lakes supported margins earned from turning crude into gasoline, diesel and other products. That measure, known as the crack spread, has been above $50 a barrel on the US West Coast this year, and close to $30 nationwide.
Marathon was up as much as 48% in the first weeks of the year, with Valero and Phillips close on its heels at 41% and 30%, respectively. That all changed in early April, when interest-rate expectations abruptly shifted from optimism to worry, triggering concern about economic growth and the energy demand that underpins it.
Since then, Marathon and Valero have each declined 9% and Phillips has dropped 8%. Valero will kick off first-quarter earnings season for the biggest independent refiners before US equity markets open on Thursday. Phillips will follow the next day and Marathon will report on April 30.
On a combined basis, the trio control roughly four out of every 10 barrels of crude processed in the world’s largest economy, according to data collected by Bloomberg. That puts them in a unique position to see first-hand how demand for fuels that power, trucks, trains, airplanes and cars is fluctuating as the economy waxes and wanes.
Read More: US REFINERY INSIGHTS: Eyes on Summer as Turnaround Season Peaks
“US refiners got off to a hot start in 2024 as federal-fund rate expectations bottomed out in mid-January,” said Bloomberg Intelligence analyst Brett Gibbs. Now “the focus is setting in on the shape of domestic demand.”
Gasoline and diesel demand already are lower than normal for this time of year, which is an “overhang heading into the summer-driving stretch” when US demand typically peaks, he added.
Later this year, about 1 million barrels of new, daily refining capacity is expected to come online even as gasoline demand expands by less than 1%, according to Austin Lin, an analyst at Wood Mackenzie Ltd. That will increase competition for US fuel makers.
For the time being, Wall Street is still bullish on independent refiners, or fuel makers that don’t also drill oil wells or operate huge chemical businesses. Among Marathon Petroleum, Valero and Phillips 66, the buy-to-sell-or-hold ratio averages 68%, according to data compiled by Bloomberg.
Ukrainian attacks on Russian refineries along with Red Sea shipping disruptions have created global daily supply gaps to the tune of hundreds of thousands of barrels, according to TD Cowen’s Jason Gabelman and Michael Laupheimer.
Moreover, many refiners got seasonal repairs and maintenance work out of the way early in the year, which puts them in a better position to capitalize on any spikes in summer fuel demand.
“Are these cracks sustainable?” asked Nitin Kumar, an analyst at Mizuho Securities USA. Top of mind for investors monitoring earnings-season conference calls will be answers to questions such as, “Are they seeing strength in demand? Are they seeing any softness in US markets, especially after the turnaround season ended?”
--With assistance from Barbara Powell.
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