Big Oil Results: The Refining Indicators Mirror The Outcomes

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Summary

Big Oil results mirror the Refining Indicators; the falling refining margins were indicating the supply-demand dynamics while much of the talk about rising prices brought in additional production over demand.

The import of crude did not slow down in the manner one would have expected; the rising gasoline imports have definitely come as a surprise; the crack spreads narrowed.

Hedge books of most integrated producers will be important to look at given the current guidance of prices, which is somewhat different from the start of the second quarter.

The Big Oil company results mirror the dynamics of a rising crude and gasoline inventory while the drooping refining margins are now appearing to stabilize at a slightly better level. This article covers the prospects of the Big Integrated producers in oil, like Shell (NYSE:RDS.A) (NYSE:RDS.B), BP (NYSE:BP), Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX).

Shell results have been slightly surprising but BP results have been good given the current challenges in the energy environment. The results in the second quarter had the tailwinds of some price recovery in crude and also some improvements in refining margins over the first quarter across all regions.

So the underlying replacement cost profit (before interest and taxes) improvement of 35% from the first quarter 2016 but a decline of 45% from the second quarter of last year for BP is explainable. The downstream had a clear improvement in refining margin from the first quarter 2016, but it was way lower than last year. This provided the $1.5 Billion profit for the downstream, but it was still lower than the first quarter ($1.8 Billion). This is explained by weaker crude oil differentials and product mix impacts specific to BP's refining portfolio. The upstream profits were lower due to lower realizations compared to a year ago, but higher than the first quarter.

Shell on the other hand had similar results in the downstream with a $1.8 Billion profit for the second quarter against $2 Billion in the first quarter of 2016 and $2.9 Billion for the year ago. This is in line with the refining margin environment, but the upstream results have been slightly lower than expected.

Exxon Mobil and Chevron's results will follow these trends. But to understand whether the required balance between supply and demand is established for the second half of the year, we must look at some data.

The latest Weekly Refining Indicators Report needs to be seen in all three dimensions: Inventories and Imports must be tallied, the Crack Spreads must be looked at, and the net long positions would indicate the direction of the future.

Let me start with the first, which is on the statistics of Inventories and Import in the U.S.

Inventories In '000s
Current Year Ago %Change 5-Year Av % Change
Total Crude 521133 459682 13% 385315 35%
Total Gasoline 241452 215922 12% 216002 12%
Diesel + Heating Oil 152003 144103 5% 134714 13%
Click to enlarge

It is clear from the data that U.S. Crude output has been rising greater than the underlying demand resulting in a 13% change in inventory from a year ago and a staggering 35% change from the 5-year average.

While this is the picture for Crude, the Gasoline and Diesel + Heating Oil is not far behind and the rising inventory from the 5-year average shows a gap of 12%-13%, which is also not a good denouement.

This is somewhat explained by the picture of Imports:

Imports In '000s
Current Year Ago %Change 5 Year Av % Change
Crude 8437 7545 12% 8491 -1%
Total Gasoline 869 613 42% 648 34%
Diesel + Heating Oil 93 130 -28% 142 -35%
Click to enlarge

In the near term (last one year), the Imports faltered to slow down and the change for Gasoline particularly has been rather steep at 42% (increase). The rising imports in Gasoline and Crude were definite reasons for the rising inventories in both.

Let me now turn my attention to the Crack Spreads in Refining.

Crack spread is the differential between the price of crude oil and petroleum products extracted from it - that is, the profit margin that an oil refinery can expect to make by "cracking" crude oil (breaking its long-chain hydrocarbons into useful shorter-chain products).

Falling crack spreads is a natural corollary given the dynamics of inventories (the longs and shorts in the futures market is also one more dominant factor).

Regional Crack Spreads $/Barrel

East Coast

$

Chicago

$

Av 3Q 15

11.59

Av 3Q 15

22.29

Av 4Q 15

7.65

Av 4Q 15

15.23

Av 1Q 16

6.31

Av 1Q 16

11.95

Av 2Q 16

9.06

Av 2Q 16

15.99

QTD 16

7.31

QTD 16

12.24

Gulf Coast

$

NW Europe

$

Av 3Q 15

15.51

Av 3Q 15

16.49

Av 4Q 15

9.28

Av 4Q 15

10.88

Av 1Q 16

9.22

Av 1Q 16

7.94

Av 2Q 16

11.21

Av 2Q 16

10.59

QTD 16

9.77

QTD 16

7.88

Click to enlarge

The uptick in the refining margins is noticeable across all regions, including Western Europe for the second quarter, but is still a far cry from the levels we have seen in the past. The rise in conventional gasoline retail prices for the second quarter explains this uptick:

Date

Gasoline Retail Prices ($/B)

Date

Gasoline Retail Prices ($/B)

Mar 28, 2016

1.976

May 16, 2016

2.17

Apr 04, 2016

1.994

May 23, 2016

2.235

Apr 11, 2016

1.981

May 30, 2016

2.281

Apr 18, 2016

2.053

Jun 06, 2016

2.328

Apr 25, 2016

2.08

Jun 13, 2016

2.343

May 02, 2016

2.168

Jun 20, 2016

2.29

May 09, 2016

2.143

Jun 27, 2016

2.25

Click to enlarge

The fall in the net long positions is evident in the chart on page 9 as the number of contracts moved from 347002 to 289581 (each contract is worth 1000 barrels). Most of the players are yet to enter into new contracts as their hedges expired.

The falling refining margins were always indicating the supply-demand dynamics while much of the talk about rising prices brought in additional production over demand. The import of crude did not slow down in the manner one would have expected; the rising gasoline imports have definitely come as a surprise.

The third quarter becomes crucial as hedge books of most integrated producers will be important to look at given the current guidance of prices, which is somewhat different from the start of the second quarter outlook.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.