Summer driving season is in full swing and American motorists are filling their tanks at a healthy clip, but that is not swelling the profit margins as much as usual at U.S. independent oil refiners such as PBF Energy Inc and Valero Energy Corp.
In April, executives shrugged off the industry’s lousy first quarter as an aberration that would be remedied this summer.
“We still are bullish gasoline and bullish octane,” PBF CEO Tom Nimbley told investors in an earnings call back then. “The driving season really hasn’t hit that hard yet.”
Nimbley was right about the surging summer demand. But refiner margins are still being squeezed as gasoline and diesel inventories stubbornly sit well above five-year averages.
Summer gasoline demand usually fattens margins for refiners with seasonally high levels for the crack spread, the premium of a barrel of gasoline over a barrel of crude oil.
That will not happen this year, said analysts who expect the situation to remain bleak in the weeks ahead unless there are large drawdowns in inventories.
Late on Wednesday, the American Petroleum Institute, an industry group, assuaged some of those concerns, reporting a 3.6-million-barrel drawdown in gasoline stocks. Yet inventories remain much higher than they were last year at this time, and analysts have slashed earnings estimates for big U.S. refiners who report second-quarter results in coming weeks.
The situation is so dire that U.S. East Coast refineries have been cutting production. Refiners on the East Coast, known as “PADD 1” by the U.S. Energy Department, are typically the first to feel a profit pinch, because their margins tend to be thinner than those of other regions.
“PADD 1 is a holy mess,” said Andrew Lebow, senior partner at Commodity Research Group in Darien, Connecticut. “It is very unusual. If a market becomes extremely oversupplied, like PADD 1, they are going to have to cut runs.”
The U.S. gasoline crack spread <1RBc1-CLc1>, a proxy for refiner margins, has dropped 34 percent in two weeks. On Wednesday, it hit a five-year low for this time of year of $13.10 a barrel. That is less than half the crack spread of $28 a barrel at this time last year.
“An RBOB crack trading 13 bucks in the middle of driving season is unheard of,” said one trader.
East Coast gasoline stocks hit a record 72.4 million barrels, about 17 percent higher than the same time last year, data from the U.S. Energy Department showed last week. Overall, U.S. gasoline stocks were at 239 million barrels in the week to June 24, nearly 10 percent higher than last year and 15 million barrels more than the five-year average.
The glut is so extreme that several tankers full of products were forced to sit idle in New York Harbor recently, waiting to unload.
Inventories have grown despite evidence that U.S. motor travel continues to surge. Analysts noted that U.S. refiners switched to maximum gasoline mode earlier than usual during a fleeting moment of high margins in the early part of 2016. Imports also have been higher than normal in recent weeks, adding to the glut.
John Auers, executive vice president at Turner, Mason & Co, a Dallas-based consultancy, said he remains bullish on gasoline demand and refining margins this summer, noting that gasoline and diesel inventories can draw down just as fast they fill up.
“I think we will see some significant drawdowns in July and August, and that will help margins,” Auers said. “I think $50 a barrel for crude oil will be the high water mark, so gas prices will remain low and we will have a record driving season this summer.”
He warned that if inventories remain historically high at the end of the summer, refiners could be forced to cut production significantly to account for weaker seasonal demand.
The 10 largest independent U.S. refiners booked a combined net income of $944 million in the first quarter, down 74 percent from a year earlier, a Reuters analysis showed. That put profits on track to be much less than the annual level of more than $10.6 billion in the past five years.
Auers estimated that second-quarter margins would come in as the lowest for this normally profitable quarter in at least five years. Over the last 30 days, estimates for second-quarter earnings have fallen 17 to 20 percent for four of the major U.S. refiners, Phillips 66, Valero Energy, Marathon Petroleum and Tesoro, according to Thomson Reuters StarMine.
The S&P 500 oil & gas refining & marketing sub-index , composed of those four companies, has lost 22 percent this year.