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Oil Majors Hit Hard As Refining Boom Comes To An End

Oil Upstream

British Petroleum, the first oil major to announce results on Tuesday, has reported the lowest refining margins for the April to June period in the past six years. The global refining marker margin, which stood at $13.80 a barrel in the second quarter of this year, has dropped down to $10.70 a barrel in the third quarter to date. Last year, the third quarter margins were a healthy $20 a barrel.

This news doesn’t bode well for the large oil companies, which now have to deal with lower crude oil prices and lower refining margins.

The upstream business – the business of exploring for reserves and production – had taken a huge hit due to the massive drop in crude oil prices. Consider ExxonMobil, the only company among the five oil majors, which has a profitable upstream business. Its upstream net income, which was $27 billion in 2014, shrank to $7 billion in 2015.

On the other hand, all the oil majors reported a spurt in downstream margins since 2014, which seems to be waning.

“The crash in oil prices in late 2014 brought refineries worldwide a pleasant surprise: booming margins,” said Amrita Sen, chief oil analyst at consulting firm Energy Aspects Ltd. in London. “But now, the market is changing,” reports Bloomberg.

In the latest quarter, BP has seen its downstream earnings drop to $1.51 billion from $1.87 last year, and $1.81 billion in the first quarter of this year.

What is more concerning is that BP expects margins to remain “under significant pressure.”

High gasoline demand in late 2015 and early 2016 absorbed the increased refining by the oil companies. Healthy refining margins also helped the oil companies survive the sharp drop in crude oil prices in the first quarter of 2016.

However, the outcome of the increased refining is that the U.S. gasoline storage of 241 million barrels is the highest for the peak driving season in the U.S. since 1990, when the government began watching these statistics, reports CNN Money.

On Tuesday, the U.S. gasoline futures dropped below $1.31 per gallon, the lowest for the summer season, in more than a decade, reports Bloomberg.

What this has led to is that the upstream segment, which was sort of recovering with oil prices close to $50 a barrel, is again looking shaky with oil having dropped to $42 a barrel and the downstream, which was supporting the profits, is floundering.

“There will be weakness in the second half of this year because of refineries,” said Ahmed Ben Salem, an analyst at Oddo & Cie in Paris. “Even though the companies have been successful in reducing costs, there are still some big challenges ahead for BP and the other oil majors,” reports Bloomberg.

The net debt to capital of BP has increased, from 18.8 percent to 24.7 percent. The net debt has increased from $24.8 billion to $30.9 billion.

“The majors aren’t going to get the cash flow from downstream that they were hoping,” said Harold “Skip” York, vice president of integrated energy at consulting firm Wood Mackenzie Ltd. in Houston. “They have some discretionary capital spending they could cut in 2017.”

With both the crude oil prices and gasoline prices tanking, the road ahead looks patchy for the oil majors.

By Rakesh Upadhyay for Oilprice.com

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