U.S. Refinery Profits May Fall as Economic Growth Sputters: Energy Markets

The oil tanker Seaqueen is docked at the Valero Energy Corp. refinery at the Port of Corpus Christi. Photographer: Eddie Seal/Bloomberg

The profit from making gasoline may slide to the lowest level in 10 months as faltering U.S. consumer growth hurts refiners that have boosted production in anticipation of an economic rebound.

Margins on gasoline, the difference between what producers pay for crude and how much they get for the refined fuel, are poised to drop as much as 75 percent in coming months, according to James Cordier, president of futures brokerage Liberty Trading Group in Tampa, Florida. Margins, or crack spreads, were $10.41 at 9:29 a.m., down 45 percent from the 15-month high of $18.77 on May 13, based on futures prices on the New York Mercantile Exchange. They reached $2.23 in September 2009.

Refiners have accelerated output by 11 percent since the end of March on forecasts of rising demand, driving stockpiles to a two-month high as of the week ended July 16, according to the Energy Department. Now the profit is being eroded by declining factory production and consumer confidence at the lowest level in a year.

“Over-optimism has created an excess of output relative to demand and the economy is struggling under the weight of a continued stream of bad, disappointing news,” said Walter J. Zimmerman Jr., vice president of market analysis at United-ICAP in Jersey City, New Jersey. “It’s hard to be optimistic about the outlook for margins.”

Profit margins and gasoline futures rose to a 2010 high in May while demand climbed to this year’s high in June, encouraging companies such as Exxon Mobil Corp. and Valero Energy Corp. to increase output. Refinery use, after dipping to a 16-month low of 77.7 percent on Jan. 29, reached 91.5 percent last week, the highest level since August 2007, Energy Department data show.

Slowing Pace

The Standard & Poor’s 500 Index, which commodities have tracked as it fluctuated on expectations about the pace of recovery, fell 1.2 percent last week. It lost 1.3 percent yesterday after Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee that the U.S. “economic outlook remains unusually uncertain.”

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 66.5, the lowest level since August 2009, from 76 in June. The 9.5-point decline in the index was the biggest since October 2008.

“If, as it appears, the pace of economic recovery is slowing significantly and demand continues to show weakness, the cracks are subject to significant declines,” said Tom Knight, vice president of trading and supply at Truman Arnold Cos. in Texarkana, Texas.

Peak Demand

Consumption peaked for the year on June 25 at 9.46 million barrels a day, according to Energy Department data. Demand, measured as the amount refiners and blenders supply to wholesalers, rose 3.9 percent in the week ended July 16.

“Any bump up in demand was purely vacation driven,” said Cordier. “The strength of the economy is going to be a dictator of gasoline demand and the economy is lousy. The crack spreads are going to suffer greatly and the magnitude will be similar to last year.”

Supplies of gasoline increased 1.1 million barrels in the week ended July 16 to 222.2 million, an 11-week high, according to the Energy Department.

“Refiners have to go back to low runs or else face collapsing margins,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.

2009 Trough

Refiners raised run rates to 87.9 percent on July 10 last year. Demand climbed to its highest level two months earlier, on May 22. The crack spread peaked on May 13. Margins fell as much as 88 percent to a low of $2.23 on Sept. 29, a month before the U.S. jobless rate reached a 26-year-high of 10.9 percent.

“If you get a precipitous downturn, inventories will surge very quickly if demand this summer doesn’t pick up pretty quick and we get no hurricane,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “If unemployment and inventories stay high, crack spreads could go to very, very low levels again.”

Refiners show no sign they won’t bring more production back on line. Valero, the largest in the U.S., is repairing its 275,000 barrel-a-day refinery in Aruba, shut for almost two years because of poor margins and a tax dispute. Valero, which has tried to find a buyer for the plant, said it will restart Aruba in September.

“We can’t control the economy and the margin environment, but those things are improving and we expect that by the time the refinery is physically ready to be restarted, there will be a positive margin environment,” Bill Day, a spokesman for San Antonio-based Valero, said in an interview. Aruba makes intermediate feedstocks for U.S. refineries.

To contact the reporters on this story: Barbara Powell in Dallas at bpowell4@bloomberg.net.