Analysts Bullish on US Refining Profits but Cautious Over Post-Middle East Conflict Glut
U.S. independent refiners, which will begin reporting second-quarter results later this week, are expected to post stellar profits driven by high crack spreads in an extremely tight global product market, analysts say.
However, they also warn of a possible rapid drop of refining margins should Middle East barrels swiftly return with the conclusion of the conflict in the region.
During Q1, U.S. refining companies racked up decent profits due to an already-tight global diesel market before the Middle East conflict broke out in late February, said John Royall, senior research analyst at investment bank Piper Sandler.
Meanwhile, the Iran war piled on new supply fears due to the Strait of Hormuz closure and an estimated 3 million b/d of disruption from damage or downtime to the Persian Gulf refining capacity, Royall said.
Despite a preliminary U.S.-Iran deal to restart oil flows in June and subsequent exchange of strikes, a combination of continued refinery downtime, low global product inventory levels, halted Russian supplies and limited world refining capacity additions should keep product prices firm, he said.
“We find today’s refining market to have highly bullish fundamentals in both the near- and medium-term on this supply tightness,” Royall said in a note.
However, Royall said he expects only “modest upside” from current levels, citing lofty stock valuation for large-cap refiners following sharp rallies so far this year.
Shares of relatively smaller regional refiners like PBF Energy, Par Pacific and Delek have more than doubled since the start of this year, and those of Marathon Petroleum, Valero Energy and HF Sinclair increased by 80%-100% during the period.
Jason Gabelman, an oil and refining analyst at TD Cowen, said the stocks of U.S. refiners could keep hitting record highs on the back of a strong refining macro outlook. In addition, he expects the profit for the current July-to-September Q3 should exceed that of Q2.
However, Gabelman acknowledged that current margins are “not sustainable,” and that there could be a quick decline in crack spreads. Still, he said the group should generate “material” cash flows in Q3 even if there is a pullback in cracks.
On Monday, crude oil contracts finished around $6-9/bbl lower after both the U.S. and Iran paused strikes over the weekend on signs of renewed diplomatic efforts to resolve the five-month-old war and the restart of vital oil flows.
Matthew Blair, a refining analyst at Tudor, Pickering, Holt & Co., said Monday refined product futures outperformed crude prices, with New York Harbor and North West Europe gasoline cracks increasing $2-3/bbl and diesel margins up about $5-7/bbl.
“The recent geopolitical disruptions are fueling an extremely strong start to Q3, with notable gains in both U.S. gasoline (up $13/bbl quarter over quarter) and U.S. diesel cracks (up $14/bbl q-on-q) off robust Q2 levels,” Blair said in a note.
On Tuesday, HF Sinclair, which operates seven U.S. oil refineries and also makes lubricants and specialty products, will kick off a string of Q2 earnings announcements, followed by Valero Energy and PBF Energy on Thursday. On Friday, U.S. integrated majors ExxonMobil and Chevron are scheduled to release their financial results.
Next week, the largest U.S. refinery operator, Marathon Petroleum, as well as Phillips 66 and several other refiners will report their Q2 earnings.
Reporting by Frank Tang, ftang@opisnet.com; Editing by Michael Kelly, mkelly@opisnet.com