North American refiners, while benefiting from slow recovery of the global economy, remain vulnerable to pressures from global overcapacity, relatively expensive crude oil, and high US unemployment rates, says Fitch Ratings.
In 2011, refineries with "high-quality, deep-conversion assets" will perform "reasonably well," Fitch said in an annual outlook. Marginal refineries will struggle.
Fitch rated creditworthiness of half the US refiners it tracks as "stable" and half as "negative."
In general, refining performance will depend mainly on the speed of economic recovery in the US, Fitch said. Refiners able to export high-specification distillates to Asia and Latin America recently have experienced margins higher than those of competitors focused on US gasoline markets.
Major trends cited by the credit monitoring service include the primacy of distillates over gasoline; deepening discounts for heavy, sour, high-acid crudes; and demand growth constrained by regulation.
"The industry as a whole faces stiff regulatory headwinds from the mandate for increased renewable fuel use in the US, rising fuel efficiency standards across the US vehicle fleet, and pending carbon regulation on the state and potentially national levels," Fitch said.
A "significant double-dip recession" would hurt credit value of all the refining industry but isn't part of the Fitch outlook.
"A second risk for North American refiners would be the possibility of a sharp and sustained spike in crude oil prices based on a rapidly depreciating dollar, which would sharply raise prices for US end users and choke off domestic demand," Fitch said.
Crack spread recovery
The firm noted a recent recovery in benchmark crack spreads to "reasonable levels," although regional differences persist, with East Coast spreads wider than those on the West Coast. East Coast refiners remain vulnerable to gasoline imports during the driving season, especially from Europe.
Capacity utilization, while improving, remains low, Fitch said.
"Looking forward, Fitch anticipates further gradual improvements in industry profitability in the form of higher utilization rates and/or better margin generation," it said.
Quality differentials have recovered after collapsing in 2009 and likely will widen further as oil demand recovers and members of the Organization of Petroleum Exporting Countries raise production. Incremental OPEC flows will tend to be lower-grade crudes, output of which exporters cut first when they trim total production to meet OPEC quotas.
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