Profits for US refiners drop in Q2 due to low margins and weak fuel demand

U.S. Oil Refiners Brace for Lower Second Quarter Earnings

In New York, U.S. oil refiners are projected to announce significantly reduced second quarter earnings, a stark contrast from the same period last year, as lower summer driving demand eroded refining margins. During the three months ending June 30, refiners boosted processing capacity to 93.5%, up from 91% in the previous year, in anticipation of elevated gasoline and diesel demand. However, this predicted surge did not materialize, as reported by the Energy Information Administration (EIA).

Impact of Increased Diesel Inventories

The rise in diesel inventories over the quarter, attributed to new refineries in the Middle East and increased exports from China, led to diminished refining margins and consequently hurt profits, according to energy analysts. TD Cowen analyst Jason Gabelman remarked, "Refining cracks weakened through the second quarter," surprising investors.

Major Oil Companies Affected

Earlier this month, BP and Exxon Mobil acknowledged that reduced refining margins, partly due to lower fuel prices, would impact their second-quarter results. BP and Exxon Mobil are scheduled to report their earnings on July 30 and August 2, respectively.

Declining Crack Spreads

The U.S. gasoline crack spread, representing the price difference between gasoline and crude oil futures, declined to $22.02 a barrel in June, the lowest since February. Similarly, the diesel crack spread hit a two-year low of $22.22 a barrel in June.

Individual Refiners' Earnings Forecasts

Valero Energy, the second-largest U.S. refiner by capacity, will kick off the earnings season for refiners on Thursday, with analysts predicting $2.60 per share profit, a drop from $5.40 a year ago, based on data from LSEG. Valero's shares have fallen approximately 14% since the end of the first quarter, countering prior gains.

Marathon Petroleum, the leading U.S. refiner by volume, is predicted to report $3.22 per share profit on August 6, a reduction from $5.32 a year previous, according to LSEG estimates. Phillips 66 is expected to declare earnings of $1.98 per share at the end of the month, compared to $3.87 a year ago.

Future Outlook

Looking ahead, the combination of soft gasoline demand and increased global diesel supply might persist, further constraining margins in the near future. According to Matthew Blair, downstream research director at financial firm Tudor, Pickering, Holt and Co., U.S. West Coast operators may have to reduce refinery runs due to the poor margin environment. EIA data indicates that refinery margins for gasoline and diesel on the U.S. West Coast fell below average this spring.

Patrick De Haan, a petroleum analyst at GasBuddy.com, commented, "With summer coming to a close, demand will fall further. Not much to look forward to for refiners."