Oil Refiners Slip as Margins Fall from Record Highs

Refinery margins—the difference between the cost of a barrel of oil and the value of the products that can be made from it—had soared in the second quarter because the companies weren’t making enough products like diesel and gasoline as people started traveling more. But now, that shortfall has eased, in part because demand has fallen as economic growth has weakened in much of the world. Restrictions to fight Covid-19 have cut into fuel consumption as well.

Refineries are processing more crude by operating near the limits of their capacity, which has helped to shore up supplies too. This week, the International Energy Agency reported that refineries are likely to hit their highest production levels since January 2020 this month, as refineries around the world have ramped up production.

Output has risen so much, the agency said in a monthly report, that it is now outstripping demand. And capacity is set to rise next year too, further easing the crunch and possibly putting a lid on gasoline and diesel prices.

Exxon Mobil
(XOM) has already announced an expansion at one of its refineries that will add 250,000 barrels a day of capacity early next year.

In recent weeks, refiners have been telling investors that margins had slipped, although they remain above historical norms. Margins are “not what we experienced in the second quarter, but certainly, well above what we would consider to be a traditional mid-cycle,” said Valero CEO Joseph Gorder on the company’s earnings call late last month.

Valero’s stock has fallen particularly hard in recent weeks as margins have contracted. It is down 22% from its June high. 

That said, the refiners had been preparing for margins to moderate. building up cash cushions when they were at their peaks. And refining capacity is still only expanding gradually, with construction around the world being delayed by Covid-19.

In the U.S., despite Biden’s attempts to expand capacity, it’s unlikely any new refineries will be built in the coming years. So while margins may have come down from their peaks, it is likely that they will be strong for an extended period. Current margins are “still spectacular,” wrote Tom Kloza, global head of energy analysis at OPIS, in an email to Barron’s.

They could tick higher again when some refineries stop operating for maintenance in September. “I still see real epic margins for jet fuel and diesel in the last 100 days of 2022 and beyond,” Kloza wrote.

 OPIS is owned by Dow Jones, publisher of Barron’s. 

Write to Avi Salzman at avi.salzman@barrons.com