By OGJ editors
HOUSTON, Sept.10 -- Although US refining margins are expected to remain under pressure for the near term, heating oil inventory levels appear to be the key to an anticipated recovery in refining margins, an analyst said.
"We expect heating oil inventories to become a more important factor influencing refining margins in the coming months as the industry has exited the prime gasoline season and is now entering the winter heating season," said Andrew Rosenfeld of Prudential Securities Inc.
Product inventories
Heating oil inventories are 8% above levels for the same time last year and are in the middle of their 5-year range. Yet heating oil inventories have not grown as expected for several months because of lower refinery operating rates and also because several refiners have used heating oil as a feedstock for gasoline production, Rosenfeld said.
Total US refined product inventories are 4% higher than levels for the same period last year and remain in the middle of their 5-year range even though refining operating rates have been at or below 5-year lows most of the year, he said.
Refining margins are expected to expand if the winter is colder than normal, he said. "In contrast, if the winter is warmer than normal, we believe refiners would make additional operating rate reductions to prevent inventory from building, as they did during the 2001-02 winter heating season. . . Refining margins would most likely contract under this scenario."
Refined product demand
The demand contraction experienced through July has prompted Prudential Securities to cut its 2002 refined product demand growth rate forecast to ?0.2% from 0.5%. This is 0.6% below the US Energy Information Administration's forecast.
"Our forecast assumes that demand will pick up in (the second half of 2002) but not enough to prevent a decline for the full year 2002," Rosenfeld said. The revised 2002 refined product demand forecast is 19.96 million b/d.
If Prudential Securities' forecast proves correct, then 2002 would be the second consecutive year of negative US refined product demand growth—which has not happened since the 1990-91 recession.
"In addition, we believe 2002 will mark the third consecutive year in which the product demand growth rate will fall below the capacity growth rate, signifying that the US should need fewer imports in the short term. In fact, total refined product net imports through June have declined by 17.3% vs. the year-earlier period despite the fact that net imports of gasoline have increased by 9.4%," Rosenfeld said.
Prudential Securities also lowered its 2003 refined product demand forecast by 1 million b/d to 19.95 million b/d, reflecting the revised 2002 demand growth rate forecast. The firm's projected 2003 refined product demand growth rate of 1.7% compared with the EIA's forecast of 2.9% for 2003.
Refining margins
Refining margins have averaged $4.40/bbl year-to-date, which is 46% lower than the average refining margin during the same period last year, Rosenfeld said. Prudential Securities is maintaining its 2002 refining margin forecast of $4.15/bbl, which is 11% lower than its normalized estimate of $4.65/bbl.
"However, we believe refining margins will return to our normalized estimate of $4.65/bbl in 2003," Rosenfeld said. This forecast rests on the following three assumptions:
-- Refined product demand will improve by 1.7% vs. 2002.
-- Refined product inventories will decline by 4% from current levels, bringing them to slightly below the middle of their 5-year range.
-- Normal weather patterns will prevail.