From Bloomberg
America’s gasoline producers can run, but they can’t hide from a plunge in refining profit margins that sanctions against Venezuelan crude would only worsen, analysts said.
The biggest U.S. refiners are expected to report strong fourth-quarter earnings thanks to profits from diesel processing in a strong U.S. economy, as well as a drop of about 40 percent in crude prices. But that’s all expected to change this year as gasoline stockpiles surge, and a shortage of heavy crude from Venezuela wouldn’t make refiners’ lot any easier.
“It’s really the first quarter that’s the big concern among investors right now,” Matthew Blair, an analyst at Tudor Pickering Holt & Co., said Thursday in a phone interview. “We’ve lost some of those crude differentials, diesel’s come down a little bit and gasoline is super weak.”
The spread between benchmark gasoline prices and oil futures, an indication of how profitable it is for refiners to produce the motor fuel, plummeted to as low as $5.693 a barrel on Thursday, the narrowest since October 2013. Demand for gasoline in the U.S. has flatlined over the past two years while output is up. Refiners have been focused on benefiting from better demand for diesel in a strong U.S. economy.
But the combination of a shale boom, which contributes lighter oil, along with output cuts from OPEC and Canada, which means less heavy oil, compounds the problem. That’s because light oil yields more gasoline than diesel, so as fuel producers seek to ramp up diesel production, they are piling up on excess gasoline. At the same time, a scarcity of heavy crude is making it more expensive and less lucrative to process.
Add on top of that the possibility of U.S. sanctions on Venezuela’s oil, which is also heavy, and the refiners are in a squeeze.
‘Economic Rent’
Some refiners are shutting or reducing rates in fluid catalytic crackers, key units in gasoline production. Given the bearish outlook for the fuel, more may follow suit, Alex Beard, head of oil at Glencore Plc, at the World Economic Forum in Davos, Switzerland on Thursday.
None of PBF Energy Inc.’s FCCs are running at full capacity due to weak gasoline margins, Chief Executive Officer Thomas Nimbley said earlier this month. And Citgo Petroleum Corp. shut a small FCC at its Corpus Christi, Texas, refinery, according to a person familiar with the matter.
“The crude quality mismatch will grow even bigger,” Paola Rodriguez-Masiu, an analyst at Rystad Energy, said Thursday in a report. “Venezuela is very important for oil markets, not so much the sheer volumes but rather for the quality of their crude. Sanctions would make U.S. Gulf Coast refiners the biggest loser.”
Refiners would be forced to pay up for heavy crude from other nations — and incur higher shipping costs to bring those barrels home, according to Simmons Energy analysts led by Blake Fernandez. Every $1-per-barrel increase in costs would slice 8 percent off of PBF Energy Inc.’s earnings and 1 percent from Valero Energy Inc.’s, they wrote in a note to clients on Friday.
“Refiners would likely incur increased transportation costs to access alternatives” to Venezuelan oil, the Simmons analysts wrote. “Some economic rent would probably be foregone.”
