When analyzing the US refinery stocks, we are forecasting another strong quarter ahead for US refiners in Q2 2012. Our updated 2012 EPS estimates suggest continued earnings momentum for the refiners this year despite ongoing sluggishness of the US economic recovery. Gasoline crack spreads have jumped since early May 2012, diesel cracks have remained at attractive levels and wide WTI and other inland crude discounts continue to hold.
The US inland refineries continue to have a clear crack spread advantage over their coastal competition. Gasoline cracks in the Rockies, Mid-Cont and Southwest have improved through Q2 2012. West Coast margins have remained volatile with crack moving between lows of $10/bbl to a supply constrained spike of over $30/bbl in mid Q2.
Ongoing Brent to WTI differentials have helped keep inland crack spreads strong. Brent to WTI diffs have averaged $16/bbl in Q2 versus $15 in Q1 and the Seaway Pipeline has started operations and it appears the volume increase to 400,000 bbls is ahead of schedule.
Inland refiners continue to be the most profitable. Robust fundamentals continue to favor refiners with inland exposure, notable HollyFrontier (HFC), Marathon Petroleum (MPC), Tesoro (TSO) and Western Refining (WNR). Inland gasoline spreads and diesel spreads have averaged $25 - $39/bbl so far in Q2. The WTI/Brent differential continues to generally hold above $11/bbl and the WTI Midland / Cushing spread accelerated to a historical level at $8/bbl during Q2 2012.
Valero (VLO) estimates remain below the street's consensus. While news on the expansion project delay at Motiva Port Arthur, TX could drive near-term buying action on VLO, we believe tight light/heavy crude spreads to WTI Midland discounts and poor ethanol will result in a below consensus Q2.
We feel with the upward trends in EPS for Q2 that there will be a bullish trend with the US refiner stocks. It is key to understand supply dynamics in determining refining margins and reviewing oil stocks Western Canadian drilling results provides some insight into the supply dynamic.