U.S. REFINING MARGINS FIRM IN 1993

Refining margins in the U.S. will come under increasing pressure in the second half but still remain stronger than in 1992, contends Wright Killen & Co. U.S. refining margins in first half 1993 sustained a recovery that began in third quarter 1992, the Houston consultant said. U.S. refinery operating rates climbed by more than 2.2% in the first 6 months of the year as a result of increased product demand growth and decreased refining capacity as the shutdown of refineries accelerated.

Aug. 23, 1993

4 min read

Refining margins in the U.S. will come under increasing pressure in the second half but still remain stronger than in 1992, contends Wright Killen & Co.

U.S. refining margins in first half 1993 sustained a recovery that began in third quarter 1992, the Houston consultant said.

DEMAND UP, CAPACITY DOWN

U.S. refinery operating rates climbed by more than 2.2% in the first 6 months of the year as a result of increased product demand growth and decreased refining capacity as the shutdown of refineries accelerated.

As a result, first half consolidated gross average refining margins as calculated by Wright Killen increased in all U.S. refining regions from first half averages in 1992.

Regional margins ranged from $1.30/bbl on the Gulf Coast to $4.06/bbl on the West Coast.

Wright Killen refining margins are gross cash margins before depreciation, taxes, and financial charges, based on actual refinery yields and crude oil and wholesale products prices.

The consultant estimates fixed costs-excluding most corporate expenses for such activities as research and development-and variable costs based on regional refinery configurations.

According to the American Petroleum Institute, operable U.S. refinery capacity in the past 18 months has declined by about 200,000 b/d.

API data also show U.S. refiners at the end of June 1993 were using about 96.3% of about 15.51 million b/d of available capacity. At the end of June 1992, refiners were using about 92.9% of 15.57 million b/d of available capacity.

Wright Killen noted U.S. gasoline demand rose slightly more than 1% in the first half while product imports were up only slightly.

And a surge of closures hitting U.S. asphalt capacity has reduced the gap in profitability between low and high conversion refineries.

REGIONAL REFINING MARGINS

The regional rate of consolidated refining margin growth was highest in the Midwest, where Wright Killen estimated first half 1993 margins jumped to $2.37/bbl from $1.38/bbl in first half 1992. Most of the increase occurred in the first quarter, which averaged $1.75/bbl, up 207% from first quarter a year earlier.

Among year to year quarterly refining margins in the U.S., the only regional decrease reported this year was by refiners on the West Coast, where Wright Killen estimated the second quarter 1993 consolidated margin at $3.85/bbl, down 12% from second quarter 1992. Consolidated margins on the West Coast in the first quarter averaged $4.26/bbl, 48.4% higher than in first quarter 1992.

The second quarter slide reined West Coast margin growth for the first half to only 11.8% from a year ago.

The Gulf Coast's consolidated refining margin typically is the last to show improvement, because refiners in the region act as incremental suppliers of refined products east of the Rocky Mountains. Because more than 43% of U.S. refining capacity is on the Gulf Coast, the region's margin is a reliable indicator of profitability among U.S. major integrated oil companies, Wright Killen noted.

GULF COAST IMPROVEMENTS

Wright Killen attributed most of the Gulf Coast's margin improvement to refiners there running a heavier, less expensive barrel of crude than last year resulting in a cost savings of about 30cts/bbl, and higher asphalt prices.

U.S. asphalt demand rose 5% in the first half, but much of that growth was met by imports in the first 4 months.

Higher asphalt prices mostly resulted from many U.S. asphalt producers shutting down and withdrawn from the market, Wright Killen said.

"Market withdrawals occurred as individual refiners-enabled by new or expanded heavy oil upgrading facilities-shifted crude and production slates," Hobbs said. "As asphalt margins often deteriorate late in the season, we expect low conversion refinery profitability to decrease during the second half of the year."

Compared with refining margins, New York Mercantile Exchange crack spreads-essentially gasoline and diesel prices less crude oil costs-have been weak. Wright Killen said relatively weak crack spreads indicate that jet fuel, asphalt, and other product prices are contributing to refiners' margin strength.

Stronger jet fuel prices in first half 1993 contributed to refining margin improvement in the Gulf Coast region. In the first half of 1992, Gulf Coast spot jet fuel prices averaged 3cts gal less than unleaded gasoline, compared with about 0.5cts/gal in first half 1993.

Since 10% of Gulf Coast refiners' product slates are jet fuel or kerosine, Wright Killen estimates the greatest possible refining margin improvement in the region attributable to jet fuel at 10cts/bbl of crude oil processed.