U.S. refiners are cutting production to reverse declining profit margins due to record high inventories ahead of the summer driving season, Reuters reports.
Refiners are trying to prevent a repeat of last winter, when the industry amassed huge gasoline stockpiles that even a record summer driving season failed to draw down.
At least three refineries have cut runs, according to the report: Marathon Petroleum (NYSE:MPC) has cut production by 11% to 195K bbl/day at its Catlettsburg, Ky., refinery over the past month, and PBF Energy (NYSE:PBF) has said it ran its 180K bbl/day refinery in Toledo, Ohio, at reduced rates and shut the sweet crude unit at the company's Chalmette, La., refinery for economic reasons.
More refiners will follow suit and cut runs if stockpiles are still high when the maintenance season ends, Wood Mackenzie analyst Mark Broadbent says.
Valero Energy (VLO -4%) sinks even after reporting better than expected Q4 earnings and revenues, as its bottom line continues to suffer from higher ethanol fuel blending costs.
VLO says its fuel blending costs - mostly derived from RINs - totaled $217M in Q4, bringing its full-year fuel blending cost to $749M, 70% higher than $440M in 2015 and even above the $517M spent in 2013 when RINs soared to record highs.
Signaling that record high costs to comply with the U.S. renewable fuels program will continue this year, VLO President/CEO Joe Gorder calls it "a significant issue for us, so we continue to work aggressively with regulators" during today's earnings conference call.
VLO also forecasts FY 2017 capex of ~$1.7B, including $1.1B for growth projects.
Refiners are lower across the board: PSX -0.8%, TSO -3.7%, MPC -1%, WNR -2.9%, HFC -1.8%, PBF -2.1%, DK -2.2%, ALJ -1.9%, CVI -0.4%.
A proposal favored by Republicans in Congress for a tax of up to 20% on all imports, including crude oil, would spark a rise in fuel costs across the U.S. that would hurt east and west coast refiners more than those near the Gulf of Mexico, analysts say.
The refining industry as a whole opposes the tax, but east and west coast refiners have more reason to worry: Coastal refiners import more foreign oil and typically have a competitive advantage in accessing imports because they can buy a wider range of crude oil in various qualities - an advantage that would be lost with the tax.
Chevron (NYSE:CVX), which operates two refineries in California with capacity of more than 500K bbl/day, is the largest importer of foreign crude, according to government data, followed by Valero Energy (NYSE:VLO) and Phillips 66 (NYSE:PSX); PBF Energy's (NYSE:PBF) margins also would be squeezed by dependence on foreign crude shipments.
Gulf refiners likely would be on the best footing because of their easy access to domestic and foreign supplies and proximity to export markets for tax-free fuel shipments out.
U.S. crude oil climbs 3.2% to $52.45/bbl after EIA data showed that refiners processed a record amount of crude and that supplies fell at the Cushing, Okla., storage hub.
U.S. refiners churned 17.1M bbl/day of crude into fuel last week, the highest weekly figure going back to 1982, while Cushing stockpiles, which have been rising in recent weeks, fell by 579K barrels.
Prices recovered after initially falling in reaction to a higher than expected rise in total crude oil inventories to 4.1M barrels, and U.S. production jumped to more than 8.9M bbl/day during the week, the highest read since April.
But analysts say the stockpile gains largely were driven by an increase in oil imports, which rose to their highest level since 2012 as shipments of crude that were delayed at the end of last year for tax purposes are starting to appear.
Valero Energy (VLO -3.6%) is sharply lower after Deutsche Bank downgrades shares to Hold from Buy with a $65 price target, while HollyFrontier (HFC +2.2%) is higher following the firm's upgrade to Buy from Hold with a $38 target, raised from $30.
Deutsche Bank says VLO remains a fundamentally strong operator with sustainably strong capture rates, but shares are fully valued current levels, trading at a historically premium 7.1x forward EBITDA, which would more than fully price in a full repeal of RINs expenses and corporate tax reform, two major tailwinds for the refinery sector in 2017.
On HFC, the firm sees attractive leverage to key themes for the group. including RINs relief, corporate tax cuts, widening of narrow inland differentials and limited exposure to potential import/export border tax adjustments.
Refiners are mostly lower in today's trade: TSO -3.2%, PSX +0.7%, MPC -2.7%, WNR -3.2%, PBF -4.9%, CVI +0.2%.
With margins high, many refiners have delayed routine work over the past couple of years to run flat out, but now pipe fitters and ironworkers are in short supply amid a glut of billion-dollar projects, including liquefied natural gas export terminals from Cheniere (NYSEMKT:LNG) and a new petrochemical unit for Dow (NYSE:DOW).
U.S. refiners are expecting to spend $1.26B on planned maintenance next year, a 38% increase and the highest level since at least 2010, according to IIR -- but IIR also expects the Gulf Coast region to be short about 37,400 craftsmen needed to complete all the planned projects.
The EPA today issued final regulations requiring that the amount of ethanol and other biofuels that must be blended into the U.S. fuel supply must increase by 6% next year.
Since the result is a significant gain over the 4% the EPA recommended in an earlier draft proposal, it is a victory for ethanol makers and a defeat for oil companies that say using more biofuels in gasoline and diesel is costly and unachievable.
The EPA set the 2017 target for total renewable fuel use at 19.28B gallons, higher than the initial proposal for 18.8B gallons as well as this year's 18.1B gallon requirement; the new mandate includes 15B gallons for conventional biofuel, which is mostly corn-based ethanol, vs. 14.5B gallons last year.
Tesoro (NYSE:TSO) exec Stephen Brown says the plan is "unworkable" as it forces the use of biofuels beyond the blend wall and that it highlights the need for a legislative overhaul of the program.