The last week in Refining
We've hit a week of stabilizing prices across the board. Oil is settling around $100/bbl and transportation fuels have barely budged in the last week with Gasoline cracks around $20/bbl and Diesel around $45.
With refiners averaging 94% utilization, retail gasoline prices have dropped significantly from over >$5 to under $4 in many areas. With this price drop and peak summer driving season upon us, I think we stabilize in this price range for the time being.
In the meantime, diesel supplies remain tight with inventories 28 million barrels below the five-year average. Diesel prices are expected to remain elevated for some time.
Whole barrel crack spreads (5-3-2 & 3-2-1) remain in excess of $30/bbl (Gross Profit). In order to maintain maximum utilization, expenses are rising as well. Costs per barrel range widely based on scale and efficiency, but where a refinery may have been running at a cost of $5-$6/bbl, they are now running at $8-$9/bbl, +50%. On average, they're still netting over $20/bbl. Pretty easy math to look up crude capacity and apply the above numbers, I still expect most refiners to post earnings well above expectations.
2022 Consensus EBITDA Revisions for the last 3 months have been raised between 50%-100% for most refiners, and I still think they are underestimating just how good refining is right now. I know at least one refiner who met their quarterly targets in the first month, suggesting a 200% revision is in order. 🤯
The big question is how long can these margins last? Towards the end of summer, I could see gasoline demand erode a bit more, especially if production remains high to meet other product demands. Also a recession could definitely pull some demand from the heavy transportation fuels market (diesel/jet). If we aren't buying as many goods, shipping demand will decline. Winter heating could replace some of this lost demand.
Supply side could also be affected however. There are several major refinery outages planned over the winter when demand is typically lower. There is also always the possibility of mother nature having an impact (hurricane, freeze, flooding, etc.). And don't forget many of these plants have been delaying maintenance for several years, this significantly raises the chances of unplanned outages due to equipment failures.
Considering all these factors, I expect to see refinery cracks to remain over $20/bbl through summer of 2023 at least. At these levels, refiners should remain a good investment. If cracks drop below this range, it will be time to re-evaluate the thesis.
Based on historical swings in the O&G sector, we should have a good 2-3 year run where energy (and refining specifically) do quite well. But as we've seen with other sectors in the last couple of years, things don't always happen as history would suggest, so I'll keep a close eye out for changes... and let you guy's know what I'm seeing.