Billionaire investor Carl Icahn has called on the EPA to make changes to the market for renewable fuel credits or else risk "the mother of all short squeezes" that could bankrupt refiners.
"The RIN market is the quintessential example of a 'rigged' market where large gas station chains, big oil companies and large speculators are assured to make windfall profits at the expense of small and midsized independent refineries which have been designated the 'obligated parties' to deliver RINs."
The decline was not stemmed by yesterday’s EIA projection that summer gasoline demand will rise to a record 9.5M bbl/day, as gasoline imports into the U.S. east coast, which primarily come from refineries in eastern Canada and Europe, have kept U.S. inventories at the highest levels in at least 20 years.
"We’re seeing the economics change to the point that many refiners along the coast are looking at maximizing jet fuel and diesel at the expense of gasoline," analyst Andy Lipow tells Bloomberg.
The falling margins are hurting refiners, with Bloomberg's North America Refining & Marketing index down 28% Y/Y; in today's trade, WNR -3.1%, HFC -2.7%, CVRR -2.2%, VLO -2.2%, TSO -2%, NTI -0.8%, ALJ -0.8%.
Western Refining (WNR +3.7%) is higher following news that it secured a new $500M senior secured term loan credit facility, which it expects to close concurrent with the successful closing of its Northern Tier Energy (NTI +1.5%) acquisition in late June.
WNR says it plans to use the proceeds from the Term Loan B-2 to partially fund the NTI takeover.
Apart from the end of seasonal trade, the biggest reason to sell refiner holdings this summer is the increasing likelihood of recession in 2017 and more so in 2018, Credit Suisse says, also expressing concern about deterioration of diesel margins.
Credit Suisse expects tight butane blending spreads and stock specific maintenance will have a negative impact on the already weak performance of U.S. independent refiners in 2016.
The firm downgrades "sector bellwether" Valero Energy (VLO -2.5%), Alon USA Partners (ALDW -1.3%), Northern Tier Energy (NTI -0.8%) to Neutral from Outperform and Calumet Specialty Products Partners (CLMT -2.9%) to Underperform from Outperform.
Northern Tier Energy (NTI -0.7%) is downgraded to Underweight from Overweight with a $25 price target, reduced from $31, at Barclays, which says the change in outlook is not a reflection of NTI's fundamentals but reflects the high probability that the pending acquisition by Western Refining (WNR -0.7%) will close in H1 2016.
Given the current negative sentiment in the refining space, the firm does not expect WNR to raise its bid a second time, indicating limited upside for NTI vs. the rest of the refining space.
Northern Tier Energy (NYSE:NTI) +9.1% AH after Western Refining (NYSE:WNR) agrees to acquire the ~62% of the company it does not already own in a revised offer that values NTI at $2.43B.
NTI unitholders will now receive $15/share in cash and 0.2986 of a share of WNR for each unit held; in October, WNR offered $17.50/share in cash and 0.2266 of a share for each NTI unit.
The companies say the merger will result in a diversified refining asset base with three top tier refineries that have direct pipeline access to advantaged crude oil basins, and that the deal includes increased flexibility to sell NTI traditional logistics assets to Western Refining Logistics (NYSE:WNRL).
The tax provision meant to blunt potential damage to domestic refiners of allowing unfettered crude exports would allow non-integrated refiners to count 75% of their oil transportation costs toward an existing manufacturing tax deduction.
Refiners are "positioned to succeed regardless,” says Carl Larry, head of oil and gas for Frost & Sullivan. “They can still make products cheaper than anywhere in the world... Regardless of whether the U.S. exports crude, they’ll be ahead of the game.”
Wells Fargo contends that lifting the ban will have only a minimal impact in the short term, and notes that Phillips 66 (PSX +1.6%) has indicated lifting the move would have no material impact at least for one year; Valero Energy (VLO +1.2%) is better positioned than most because it already relies on a larger percentage of foreign oil for its feedstock to make gasoline and other petroleum products, says Simmons analyst Jeff Dietert.
Lawmakers have agreed to lift the four-decade-old ban on crude oil exports as part of a spending and tax package announced by congressional leadership late Tuesday night.
The spending measure also includes temporary wind and solar power tax credits that will expire in several years.
Lifting the crude export ban has been a key goal for Republicans, who have said American oil producers should get expanded access to the international market at a time of low prices and new competition from Iranian oil.
The deep discount for benchmark U.S. crude oil prices vs. global rates looks poised to disappear for the first time since the rise of the shale oil boom, Reuters reports.
U.S. WTI crude for delivery in March traded at one point today just $0.20/bbl below global Brent crude for the same month, the narrowest gap since 2010.
The sudden shift in the closely-watched spread seems to be sending a signal that the domestic oil market is likely to grow tighter while the global glut gets worse, which likely will spur a renewed rise in U.S. imports and erase the cost advantage of U.S. refiners who have made billions of dollars on cut-price domestic crude.
Some oil traders say the spread is responding to signs that the U.S. Congress may throw out the 40-year old ban on exporting U.S. crude, while others cite expectations of higher OPEC production following an easing of western sanctions against Iran that is weighing on Brent.
The 40-year-old ban on most U.S. crude oil exports "very likely" will be lifted in the government spending bill, according to reports citing congressional aides from both parties, as part of a deal D.C. lawmakers are negotiating as part of spending and tax measures Congress is aiming to pass by Dec. 16.
In the deal said to be coming together, Congress would lift the export ban while also adopting environmental and renewable energy measures, including long-term extensions of wind and solar tax credits; also under discussion is a tax credit for independent domestic refineries, especially a few in the Northeast whose profits could be hurt if oil exports are allowed.
"There’s a view that this is the last chance" ahead of a presidential election year, says ClearView Energy Partners managing director Kevin Book.