Refiners are a grim lot these days, and with good reason: It's a low-margin business to begin with, and the near-term outlook is for those margins to stay shrunken.
Refiners recently have been hit with a triple whammy: High oil prices, overabundant product stocks, and depressed products demand. Independent refiners are getting the worst of it because, unlike their integrated brethren, they can't enjoy the offsetting benefits of high crude prices.
Paul Cheng, with Lehman Bros. Inc., New York City, early this month trimmed his forecast for refining margins for the full year across the board. He pegged gross margins for the US Northeast at -$0.17/bbl, a plunge of 289% from his earlier forecast; for the Midwest, $6.37/bbl, a dip of 4%; for the Midcontinent, $3.62/bbl, a drop of 20%; and for California, $6.52/bbl, a decline of 12%. For 2003, Cheng estimates those same regional margins, respectively, at $0.50/bbl, down 33% from his earlier forecast ; at $7/bbl, unchanged; at $4.50/bbl, down 10%; and $7/bbl, down 7%. He holds out the Gulf Coast refining sector as an exception, forecasting the major merchant center's gross margin at $1.32/bbl and $1.40/bbl in 2002 and 2003, respectively, vs. his earlier prediction of $1.25/bbl for both years.
Not being excepted from the grim news are the world's other two major refining merchant centers, Northwest Europe and Singapore. Cheng sees negative margins worsening in Europe this year, to -$0.36/bbl from an earlier forecast of -$0.24/bbl before turning slightly positive in 2003 at $0.25/bbl—albeit still a drop of 67%. And Singapore won't fare much better, with a paltry $0.04/bbl, unchanged, for 2002 and a 50% drop for 2003 to $0.25/bbl.
The state of inventories today is responsible for much of the refining sector's woes. The latest bad news here came with the weekly report from the American Petroleum Institute. It reported an unexpected increase in crude oil stocks of 6.3 million bbl the first week in June. What was surprising about the oil stocks surge was that it came amid an increase in refinery runs and a flat stretch for crude imports. The US Department of Energy numbers later corroborated the increase.
Crude stocks remained fairly tight in the Petroleum Allocation for Defense District (PADD) 2 region at the outset of June. They were expected to build in coming weeks, "given increasing Gulf Coast inventories and the collapse in the front-month NYMEX spread," UBS Warburg said in a June 5 report. "Attractive price differentials for North Sea and African imports and reports of unsold spot cargoes in the Atlantic Basin are also likely to keep imports at relatively high levels over the near term."
The end-of-May slump in crude oil prices brightened the picture a bit for refiners. But they found little solace, as demand for most products continues to flag, and utilization is likely to gain only slightly or remain flat in the weeks to come because of the continued high level of stocks. US inventories of gasoline, swelled by rising imports and refiners' efforts to maximize gasoline production, in early June were near the top of the range for the past 5 years. That is why UBS Warburg reckons that "2002 could very well mark the lowest summer for US refiners' profits since 1999."
The picture does not improve for distillate, where stockbuilding in the US continues apace. The slide in natural gas prices in recent weeks may worsen the distillate demand outlook by spurring more switching away from fuel oil.
In the end, is there still hope for refiners to be rescued from the doldrums this year? According to Honolulu-based consulting group FACTS Inc., it's all relative.
Flabby demand in the first quarter looks worse in comparison with a bullish first quarter 2001; conversely, the second half should look robust compared with last year's period. Overall, says FACTS, look for 2002 to post a relatively weak demand rise of 180,000-350,000 b/d vs. the dismal 17,000 b/d increase in 2001.
With most signs pointing to a strong recovery in the US and Asia-Pacific economies, the likelihood grows for a rebound in incremental growth in refined products demand, FACTS noted.
"The trick, of course, is to predict exactly when the turnaround will come," the consultant added. "Complicating matters is a substantial increase in both the absolute price of crude and price uncertainty, which is acting as a drag on petroleum product demand."
And if one thing seems certain, it's continuing uncertainty.
OGJ Hotline Market Pulse
Latest Prices as of June 7, 2002
NOTE: BECAUSE OF THE JUNE 3-4 HOLIDAY IN THE UK, THE PRICES SHOWN FOR IPE BRENT AND IPE GAS OIL ACTUALLY REPRESENT MAY 29, 30, & 31 AND JUNE 5 AND 6
Nymex heating oil
IPE gas oil
Nymex natural gas
NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.
*Futures price, next month delivery. #Spot price. @New contract