Thanks to stronger distillate margins and favorable crude differentials, refining and marketing companies’ earnings will increase by 13-15% through the end of 2019 and the growth will likely persist beyond 2020. This is according to an analysis from Moody’s Investor Service.
“Over the next 12 to 18 months, distillate margins and favorable crude differentials will propel crack spreads, a crucial factor in oil refiners’ profitability,” said Arvinder Saluja, a Moody’s vice-president senior analyst. “Meanwhile, gasoline demand will remain high, though demand from [Organization for Economic Cooperation and Development] countries likely will decline over the longer term due to increasing vehicle fuel efficiency and biofuel consumption,” Saluja said.
Distillate fundamentals will remain more favorable than gasoline fundamentals, with better demand from industrial, mining, and rebuilding activity, and already low inventories. Distillate prices are less elastic than gasoline, even with higher crude prices making distillates more expensive.
Moreover, new International Maritime Organization emission standards starting in January 2020 will mandate low-sulfur fuels for the global shipping industry, sparking demand for compliant distillate products and further straining an already tight market.
Gasoline demand will remain high in 2018-19 near record levels, even though it has peaked, according to Moody’s.
OECD gasoline demand faces long-term secular decline amid increasing vehicle fuel efficiency and biofuel consumption. US miles driven will rise by 1-2% in 2019, while gasoline demand could decline by 2-3%—potentially enough to worsen gasoline crack spreads and cap refinery utilization at 85-90% amid still-high inventories.
Rising fuel prices will also dampen gasoline demand in North America, where most buyers are consumers, who tend to be more price-conscious than general distillate business users.
Strong crude differentials will benefit domestic US R&M companies’ margins, with takeaway constraints persisting through much of 2019. Pipeline constraints today are widening crude price differentials in North America as oil production keeps increasing in various prolific shale plays and will persist until mid-to-late 2019.
Refineries will take advantage of arbitrage, purchasing cheaper crude and increasing crack spreads. The companies with complex refineries with high distillate yields, ample access to discounted crudes, and export opportunities will benefit the most.
US midstream master limited partnerships that are subsidiaries of refining companies will benefit their parents as they process and transport higher natural gas liquids and other hydrocarbon volumes from increased onshore production from third parties.
Cost of compliance with the US Environmental Protection Agency’s renewable fuel standards mandate will be lower than in the past for merchant refiners as the renewable energy credits should remain cheaper to procure. And US federal tax reforms will benefit the R&M sector more than other energy sectors, since its taxable income tends to be higher.
