US refiners still banking on 2003 recovery

June 20, 2003
US refiners are clinging tenaciously to the notion that 2003 will continue to be a recovery year.

US refiners are clinging tenaciously to the notion that 2003 will continue to be a recovery year.

After a strong first quarter, in which the refining business rebounded strongly after a truly horrible year, all the elements are in place for robust margins for the rest of the year.

The biggest threat to this rosy outlook would be a collapse in demand owing to price spikes—possibilities with both crude and gasoline.

For now, however, the outlook is for record demand, tight stocks, somewhat moderating crude prices, and essentially full capacity utilization. That's a recipe for healthy margins and profits.

First quarter turnaround

The turnaround for the US refining industry started in the first quarter, which is the last period one would expect for a refining turnaround.

"The cold winter, a heavy turnaround season, the general strike in Venezuela, and the (then) looming war in Iraq factored into strong demand for gasoline and distillates and a sharp drop in inventories," noted FitchRatings Ltd., New York.

As a result, industry margins posted US records everywhere but the West Coast in the first quarter. Where the West Coast did benefit was in the first steps toward conversion to California reformulated gasoline blended with ethanol; while West Coast margins fell short of the record, they still were 29% above last year's levels.

But the biggest factor in the first quarter turnaround for US refiners was the boom in demand for distillates. The combination of record cold temperatures persisting in many areas coupled with record natural gas prices to fuel a buying frenzy for heating oil. Demand for distillates logged a 10% gain year-to-year to stand at a record 4.3 million b/d in the quarter.

Meanwhile, demand for gasoline remained unseasonably strong during the winter, gaining almost 2% in a year-to-year comparison.

Summer outlook

The outlook for summer gasoline is a bullish one.

The US Energy Information Administration predicts record gasoline demand this summer. Economic recovery coupled with trepidation over flying (because of fears over terrorism and the SARS epidemic)—not to mention all those sport utility vehicles purchased at 0% APR in the past year—underpin the robust demand growth. EIA pegs summer gasoline demand at 9.18 million b/d, up 1.6% from last summer. Overall miles traveled are projected to rise 1.3% this summer from last summer, while fuel efficiency is expected to drop 0.3% in the same comparison.

Refiners now are running effectively full out, with capacity utilization already in the mid-90%s. Stocks remain low, entering the driving season at 200 million bbl, 13% below last year's level, and EIA expects them to end the season near that level as well. That means refiners won't have much of a cushion in the case of outages. It will be especially tight on the West Coast, as refiners there have started producing ethanol-blended gasoline for the first time amid a phasedown of methyl tertiary butyl ether.

Imports of gasoline and other refined products into the US continue to hold up strongly, as high US prices draw volumes of finished gasoline and blending components from Europe and Asia. A key contributor in this regard, Venezuela, continues to lag amid refinery problems related, at least indirectly, to civil unrest there. The uncertainty over imports of Venezuelan gasoline and blendstocks and the uneasy transition to ethanol in California will help keep upward pressure on prices.

Crude prices

Meantime, crude oil prices are likely to moderate if not collapse, as the Organization of Petroleum Exporting Countries keep a close eye on crude inventories and demand, as well as the recovery in production in Venezuela, Nigeria, and, eventually, Iraq.

For the time being, US refiners are sopping up barrels where needed—that $30/bbl or so for West Texas Intermediate notwithstanding—to make enough gasoline to meet that expected record demand.

So with EIA projecting US gasoline prices at $1.56/gal for regular self-serve, plus a possible upside of another 17¢, the refining market this year may be as attractive in 2003 as it was ugly in 2002.

(Author's e-mail: [email protected])

OGJ HOTLINE MARKET PULSE

Latest Prices as of June 20, 2003

OPEC BASKET PRICE DATA FOR JUNE 18 WERE UNAVAILABLE BECAUSE OF A LOCAL HOLIDAY

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

Click here to enlarge image

null

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.