As disastrous as integrated oil companies’ downstream segments have been in recent quarters, the picture has been bleaker for the companies that operate entirely within this slumping sector. After a run of remarkably profitable years for US refiners, the trends that helped them reversed sharply. Chief among these was their utilisation rate and the spread between lower and higher grades of crude.
With huge fixed costs, throughput has always been critical for refiners. Capacity utilisation often exceeded 95 per cent during the peak summer driving season from the mid-1990s to 2005. It remained over 90 per cent as recently as two years ago. Now it is barely above 80 per cent and may go even lower next year as huge and efficient new refineries, mostly in Asia, worsen the glut. Meanwhile, the extra slack in global oil capacity has seen producers cut their heavy crude output the most, narrowing the price differential many US refiners feasted upon. The discount on Maya, a heavy Mexican crude favoured by US Gulf Coast refiners, fell from more than $15 per barrel in 2008 to a few dollars recently.
But there is light at the end of the tunnel for stronger independents such as Valero, Tesoro and Sunoco. The shuttering of weaker refineries in the Atlantic Basin and the return of more typical discounts for heavy crude should soon stabilise margins. Meanwhile, disposals by integrated companies or by distressed peers have put some attractive assets on the block at prices not seen for a decade or more. Furthermore, pessimism over the hefty cost of US cap and trade legislation may be exaggerated. Independent refiners may have to wait five or more years to see profits return to normal, but their shares are trading as if it will be an eternity.
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