Refiners’ profit streak could fade

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The Houston Chronicle (Texas)

Soaring gasoline prices this spring and summer may have pinched drivers, but they helped U.S. oil refiners rack up huge quarterly profits and extend a hot earnings run that began several years ago.

Refining profits for 22 of the largest energy companies jumped more than 20 percent to $11.8 billion in the April-to-June period this year compared with 2006, according to the U.S. Energy Department’s Energy Information Administration.

That’s nearly double their second-quarter profits three years ago, and a record since at least the first quarter of 2000, when the Energy Information Administration began regularly compiling the profit figures.

Recently, however, a drop in a closely watched indicator of refiner profitability has spurred questions about how much longer the industry’s winning streak will last.

The difference between what refiners pay for a barrel of oil and the selling price of gasoline and other fuels made from it is known as the gross refining margin. That spread, calculated before taxes and expenses are subtracted, has narrowed sharply in recent weeks.

After averaging a record $27.65 per barrel in the second quarter, the margin is about half that level today, said Eitan Bernstein, industry analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va.

“The second quarter was great for refining margins,” he said. “Third quarter? Not so much.”

Refining margins tightened partly because higher crude prices have made gasoline more expensive to make. Also, many refineries that were down this spring for unplanned outages have returned to production. That put more gasoline on the market, reduced the need for imports and weakened the price that refiners
— and ultimately gas stations — can charge for it.

The average price for gasoline was $2.75 a gallon Monday, down 3.6 cents from a year ago and the lowest since April, the Energy Department said in a weekly report.

But a separate Energy Department report showing a sharper-than-expected drop in the nation’s gasoline supplies last week sent crude and wholesale gas prices up, and may put renewed pressure on pump prices, the department said.

It’s common for margins to fall this time of year as gasoline demand cools at the end of the busy summer vacation season.

Yet the suddenness of the collapse this year has caught industry observers by surprise, prompting speculation about what else may be going on.

Some blame a pullback by financial players in the gasoline futures market, who were drawn to the industry’s strong run in recent years but were spooked when margins began to soften. Others suggest the market is anxious about proposed increases to auto fuel economy rules and biofuel mandates, both of which could cut into gasoline demand and make refineries less profitable.

“There’s plenty of room for those who are optimistic and for those who are pessimistic to have their say,” said Fadel Gheit, energy analyst with Oppenheimer & Co. in New York.

Yet he believes the short-term outlook is strong for refining profits, noting that despite the recent drop, margins remain more than 20 percent higher than their five-year average.

The earnings and stock prices of refiners have skyrocketed in the last few years as demand for gasoline and other petroleum products has grown faster than the industry’s capacity to produce them. This era of record profits, which follows many lean years for the industry, has been called the golden age of refining.

In the second quarter, the run continued as refinery outages and higher-than-usual demand pushed pump prices above $3 a gallon nationwide.

Chevron earned $1.3 billion in profit from its refining and marketing operations in the second quarter, a 30 percent improvement from $998 million last year. Exxon Mobil, Royal Dutch Shell and ConocoPhillips also saw gains in U.S. refining operations.

Independent refiners — companies that make gasoline and other products but do not pump oil and natural gas from the ground — fared well, too.

San Antonio-based Valero Corp., the nation’s largest refiner, earned a record $2.2 billion in the second quarter, up from $1.9 billion a year ago. Tesoro Corp, also of San Antonio, posted record quarterly earnings as well. So did Dallas-based Holly Corp. and Houston’s Frontier Oil Corp.

“It’s our view that the golden age of refining is not over,” said Doug Aron, Frontier’s vice president of corporate finance.

But the big profits prompted backlash from consumers and politicians who charged the industry with manipulating the market for its own gain.

“These increases have happened quarter after quarter since Hurricane Katrina, giving U.S. drivers higher-than-hurricane prices without a natural disaster,” said Judy Dugan, research director of Santa Monica, Calif.-based consumer group, in a report last month.

Dugan and other industry critics have called for investigations of this year’s refinery outages and for stronger government oversight of refinery maintenance and production.

Charlie Drevna, executive director of the National Petrochemical and Refiners Association in Washington, said that is unnecessary. The refining industry already is shelling out billions to comply with federal regulations, and is experiencing more outages this year in part because those rules are so onerous, he said.

He also dismisses the idea that refiners would deliberately shut down facilities at a time when refining profits are near record levels. That “just doesn’t make economic sense,” he said.

Refining margins have rebounded a bit in recent days, but still are unlikely to be as high in the second half of the year as the first, said Peter Beutel, analyst with Cameron Hanover.

However, an active Gulf Coast hurricane season or a sudden change in the national economy could change that, he said.
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