The fourth quarter of 2023 was a tough one for U.S. oil refiners, who saw their earnings plummet compared to the same period a year ago. The main reasons were lower fuel prices, higher inventories, and a series of unplanned plant shutdowns.
Fuel Glut and Weak Demand
U.S. refiners enjoyed record profits in 2022 when a global supply crunch caused by Russia’s invasion of Ukraine boosted refining margins to unprecedented levels. But as the geopolitical tensions eased and new refining capacity came online, the margins began to shrink in 2023.
According to the U.S. Energy Information Administration (EIA), gasoline stockpiles rose 5% to 237 million barrels in the fourth quarter, 1.7% above the 10-year seasonal average. Retail gasoline prices averaged $3.48 per gallon in the quarter, compared with $3.69 year on year.
Distillate inventories, which include diesel and heating oil, rose 5% in the quarter but remained slightly below the five-year seasonal average. U.S. diesel futures’ spread to crude oil, which reached record highs above $80 a barrel in the fourth quarter of 2022, weakened by about $20, largely affected by declines in industrial production.
Plant Outages and Maintenance
Another factor that hurt U.S. refiners’ profits was the higher frequency and duration of plant outages, both planned and unplanned. Several refineries on the West Coast, such as PBF Energy’s Martinez and Marathon’s Carson plants, experienced unexpected disruptions throughout the quarter.
Analysts at banks such as Mizuho and Tudor, Pickering, Holt & Co revised refiner earnings lower for the fourth quarter but noted that gasoline and diesel futures are rising at the start of the year, indicating that prices could pick up in the first quarter.
U.S. fuel makers are planning to shut units and plants for longer than usual for repairs during spring turnarounds, which could raise fuel prices and help margins, analysts at TD Cowen wrote in a note.
The hit from frigid weather this month that contributed to the shut-in of 1.5 million barrels per day of processing capacity at U.S. Gulf Coast refineries should be short-lived, according to a note from Wood Mackenzie. Still, there is a possibility this may lead to other glitches as refineries come back up.
Cash Returns and Outlook
Despite the lower profits, U.S. refiners still expect to end the quarter with $16 billion in excess cash. They are likely to return it to shareholders as stock buybacks and dividends, Matthew Blair, a refining analyst at Tudor, Pickering, Holt & Co, wrote in a note.
Any guidance on payout strategies for 2024 will razor-focus investors,” Blair said.
Houston-based Valero, the second-largest U.S. refiner by capacity, kicks off the fourth quarter earnings season on Thursday and is expected to make $2.97 per share profit, compared with $8.15 per share a year ago, according to LSEG data.
Analysts expect Marathon Petroleum, the top U.S. refinery, to earn $2.21 per share, a fraction of the $7.09 per share it earned in the same quarter the prior year.
Analysts are expecting a PBF earnings profit of $0.11 per share, compared with $4.86 per share in the prior-year quarter.
Prices for distillate fuels could also rise in the quarter if Houthi attacks on vessels in the Red Sea disrupt the transportation of diesel and heating through the Suez Canal, which accounts for 15% of global waterborne distillate flows.
The outlook for U.S. refiners remains uncertain, as they face challenges from environmental regulations, renewable fuels, and electric vehicles. But as the global economy recovers from the pandemic and demand for transportation fuels grows, U.S. refiners may find new opportunities to leverage their competitive advantages and adapt to the changing energy landscape.
Source: Reuters
