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Prudential: 2004 US independent refiners' margins will be strong but not as high as 2003

By OGJ editors
HOUSTON, Dec. 31 -- Prudential Equity Group Inc. set itss 2004 average US independent refining margin forecast at $5.35/bbl, citing product inventories remaining at the bottom of a 5-year range and upon expectations of sustained demand growth.

"Despite our view of improving fundamentals, we expect refining margins to remain volatile," said analyst Andrew F. Rosenfeld.

During 2003, the US refining margin has averaged $6.95/bbl year-to-date vs. $4.61/bbl during the same period in 2002, he said in a Dec. 19 research note. He anticipates that 2003 will post the second-highest recorded refining margins during the last decade.

"Our new 2003 average US refining margin forecast of $6.85/bbl, up 10¢/bbl . . . rests upon stronger than expected fourth-quarter margins. This is 38% higher than our new normalized refining margin estimate of $4.95/bbl." Previously, the firm's normalized refining margin was $4.75/bbl.

2004 refining margin forecast
Distillate inventory levels "should be the key driver for refining margins as the industry progresses through the fourth quarter and into the first quarter of 2004. We forecast distillate inventories to continue their typical seasonal draw, which should keep them around the middle of their 5-year range during the winter heating season, assuming normal weather patterns," he said.

He forecast that refining margins will weaken seasonally and then begin to strengthen in anticipation of the gasoline production season, starting in March.

"While we expect refining margins to remain volatile, we believe the long-term fundamentals for the refining industry continue to strengthen due to a combination of low levels of capacity creep and more stringent product specifications," he said.

He believes that 2004 refining margins will be better than $4.95/bbl, but not as high as in 2003.

The new 2004 refining margin forecast is based upon four assumptions:
--Refined product demand will continue to improve.
--Refined product inventories will increase, bringing them toward the middle of
their 5-year range.
--Fewer planned and unplanned maintenance outages.
--Normal weather patterns will prevail.

Rosenfeld noted that he remains "cautious however, of unpredictable weather conditions in the Northeast in particular that could swing heating oil demand."

Regarding the higher normalized refining margin forecast, he cited "a sustained, multi-year period of increased profitability for the independent refiners, keeping in mind any seasonal or unpredictable effects such as overly severe or mild weather patterns and wide spread refinery outages. While our outlook for the industry has improved, we expect the volatility seen in recent years to remain."



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