19 October 2016, New York — U.S. independent refiners such as PBF Energy (PBF.N) and Phillips 66 (PSX.N) are expected to report another quarter of disappointing profits in coming weeks, as hopes that a record summer driving season would turn the industry’s fortunes around do not appear to have materialised.
U.S. refiners are in the midst of their worst year since the shale boom began in 2011. High fuel inventories have punished margins this year, forcing some refiners to voluntarily cut production, delay capital work, lay off workers and slash employee benefits.
With margins expected to remain under pressure, relief is not coming anytime soon, analysts say. Overall supply levels are still elevated, and the cost to meet U.S. renewable fuel standards will drag on profits for the remainder of the year.
Earnings expectations have been falling over the last month for an index of nine independent refiners that are part of the S&P 500. Over the last 30 days, the forecast for the third quarter has dropped by 3.8 percent on average, according to StarMine, a unit of Thomson Reuters.
“2016 is probably a lost year for the U.S. refining industry,” Barclays analyst Paul Cheng said.
The benchmark U.S. crack spread <CL321-1=R, a key measure of margins, steadied in the third quarter, falling about 2 percent after crashing more than 22 percent in the second quarter.
Motorists hit U.S. roads in record numbers over the summer, but the demand was not enough to deplete the massive buildup in gasoline inventories that existed heading into the summer driving season. Those inventories – the result of overproduction last winter – hurt margins.
Heading into the winter, distillate stocks are at their highest seasonally since 2010. Refiners built up distillate stocks over the summer as they pushed their plants to pump out gasoline.
The U.S. refining industry has widely blamed its economic misfortunes on the country’s renewable fuel program, which forces refiners to either blend biofuels like ethanol into their fuel pool or buy renewable fuel credits. The fuel credits, known as renewable identification numbers, or RINs, have jumped in price this year.
Delta Air Lines (DAL.N) opened the earnings season last week, reporting a $45 million loss at its Monroe Energy refinery for the third quarter, versus a $106 million profit a year ago. The company is expecting the refinery to lose more than $100 million this year, versus more than $300 million in profits last year.
Delta, which does not have a blending operation and must buy credits for the fuel it produces, said it spent $48 million in the third quarter on RINs, nearly triple what it paid last year.
Standalone refineries like PES and Monroe will continue to struggle in the Northeast because they have little advantage over international rivals and face tougher environmental obligations at home, Sandy Fielden, director of research, commodities and energy at Morningstar in Austin, Texas, said in a report due Wednesday.
“U.S. refiners margins as a whole are lower in 2016 versus 2015 and Q4 is not likely to be different with higher crude prices and soft product prices due to higher inventories,” he said.
The U.S. Energy Information Administration expects this winter to be about 18 percent colder than last year’s historically mild season.
*Jarrett Renshaw & Devika Krishna Kumar; Editing – Leslie Adler – Reuters