US refining sector stages remarkable recovery in 2000

(This is the first in a series of columns focusing on downstream markets.)

Happy days are here again for refiners, not only in the US but worldwide as well.

Will they stick around? While the heady margins of March may not be sustainable, all the indicators point to sustained recovery in the long-suffering refining business.

There are some dark clouds on the regulatory horizon from an operating standpoint for refiners, but those very threats amount to bullish market factors for the refiners that survive the ensuing shakeout.

The marketing side of the business still has some recovering to do, as retail margins continue to be squeezed by the lag effect in product street prices vis a vis the recent softening of crude oil prices.

Refining margin recovery

US refining margins are staging a dramatic comeback after collapsing to 15-year lows in 1999.

They were pulled down in part by the recovery in crude oil prices that began last year, as product price increases failed to keep pace. The other key factor was the even worse performance in European and Asian refining sectors, fueled by the surge in refining capacity additions that continued-albeit somewhat slowed from earlier rates-despite the repercussions from the economic downturn in Asia that had helped cripple oil markets in 1998.

Typically, refining margins increase when crude oil prices increase, but lag the former by as much as a year. Thus the crude oil price recovery that began in 1999 is just now being felt on the refining side of the business, and that comes at a time when crude oil prices have fallen by about $9/bbl in recent months (but it is important to note that crude prices' recent plunge was from an unsustainable high level to a level that is comfortably high for producers yet still not so high as to cripple demand).

All that translates into a big jump in refining margins. In the US, estimates Merrill Lynch, US refining margins during the first quarter are about 66% higher than they were in first quarter 1999. (The analyst also estimates that refiners' earnings per share will be up over 180% on average.). It took a little whole for refining margins to catch up, but they are finally beginning to reflect the ideal market circumstance for refiners: moderating crude oil prices, low inventories, and a tight balance of supply and demand.

What largely fueled the recovery in US refining margins was the bounce from heating oil price spikes in January, a tightening supply-demand balance in Europe (pulling more product to that market, this tightening balances even more globally), and the surge in West Coast margins. The latter factor is especially significant because it points to the cuts in runs by Asian refiners (especially Singapore) after a long and terrible trough in the market, which in turn has reduced the call on imports into the West Coast. Given the amount of refining capacity that has shut down there, especially in California, and the general tightness elsewhere in the US, that has meant a real bull run in the West Coast refining sector, where margins at one point recently rocketed to as much as $14/bbl.

There is every reason to believe that this situation will persist well into 2001, as OPEC struggles with ratcheting supply up and down to maintain crude oil prices within a band of $22-28/bbl (It is likely to remain close to the lower end of that range if the Saudis have anything to say about it, and they have more than most to say about it). While US refiners are scrambling to get more product on the market ahead of the start of the driving season, the already low stock levels suggest that product balances will remain tight throughout the season. It is likely that the need to build heating oil stocks late in the year will create a similar situation for distillates. While normally distillate demand is not a big factor in the US compared with gasoline demand during the summer, there is a big pull on the global distillate market because of the spike in demand for diesel in Europe, where it remains a much more important transportation fuel than in the US.

All of this sets the stage for an analyst such as Merrill Lynch to predict that all US refining market regions will enjoy, on a long-term historical basis, near-average margins for this year and next. Not only is that a remarkable turnaround from 15-year lows just 9 months ago, the strong showing in the first quarter of this year indicates that the analyst's forecast for this eventuality jumps forward a year. In short, Merrill Lynch had not expected this kind of recovery to occur before 2001.

With the refining sector rebound continuing in Europe and Asia and tightness continuing in stocks in the US, and with the likelihood increasing that crude oil prices will continue to be moderate-perhaps even drop another $2-3/bbl as more OPEC crude comes onto the market in the next few weeks-look for margins in the US to average about $2.65/bbl on the Gulf Coast, $4.45/bbl on the West Coast, and about $9/bbl on the West Coast this year, according to the Merrill Lynch forecast. Next year, East and West Coast margins look to be down just a few cents from this year's level, but Gulf Coast margins are likely to jump another quarter.

Next week, we'll look at refining markets outside the US.

OGJ Hotline Market Pulse
Latest Prices as of April 28, 2000

Click here to enlarge image

null

Click here to enlarge image

null

Nymex unleaded

Click here to enlarge image

null

Nymex heatin oil

Click here to enlarge image

null

IPE gas oil

Click here to enlarge image

null

Nymex natural gas

Click here to enlarge image

null

Related Articles

Chinese regulators approve Sinopec’s plan for grassroots refinery

02/06/2015 China’s National Development and Reform Commission (NDRC) has approved Sinopec Beijing Yanshan Petrochemical Co. Ltd., a subsidiary of China Nation...

Union strike ongoing at US refineries as negotiations continue

02/06/2015 A strike by union workers at nine US refining and petrochemical production plants remains under way as the United Steelworkers Union (USW) continue...

Goodlatte reintroduces bills to repeal, reform RFS

02/05/2015 Calling it “a true ‘kitchen table’ issue,” US Rep. Bob Goodlatte (R-Va.) reintroduced a pair of bills to address problems in the federal Renewable ...

Regulators approve Phillips 66’s California refinery improvement project

02/04/2015 The governing board of California’s Contra Costa County has approved a permit for Phillips 66 to move forward with a proposed project that would en...

CNOOC lets contract for Huizhou refinery expansion

02/03/2015 CNOOC Oil & Petrochemicals Co. Ltd., a subsidiary of China National Offshore Oil Corp. (CNOOC), has let a contract to Porvair Filtration Group ...

Williams reports another delay for Geismar ethylene sales

02/03/2015 An unexpected maintenance setback in the final stages of start-up at Williams Partners LP’s newly rebuilt Geismar, La., olefins plant has led to an...

MOL absorbs Eni’s Romanian retail assets

02/02/2015

MOL Group, Budapest, has completed the acquisition of Eni Romania, including 42 service stations to be rebranded under the MOL name.

CNOOC subsidiary inks deal for grassroots refinery

02/02/2015 Hebei Zhongjie Petrochemical Group Co. Ltd., a subsidiary of China National Offshore Oil Corp. (CNOOC), has entered into a $700 million agreement w...

Sasol lets contract for Louisiana petrochemicals plant

02/02/2015 South Africa’s Sasol Ltd. has let a contract to GE Oil & Gas, Florence, Italy, to provide the main-compression trains required for a low-densit...
White Papers

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...
Available Webcasts


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

When Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST



On Demand

Prevention, Detection and Mitigation of pipeline leaks in the modern world

Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST


Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected