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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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U.S. Refineries Profit From Cheap Sour Crude

  • Top American refiners continue to post bumper profits.
  • Cheaper sour crude grades have helped refiners keep earnings elevated.
  • The strong results from supermajors have prompted renewed criticism from President Biden.

Despite a decline in refining margins in recent months, the biggest American refiners continue to post bumper profits, helped by cheaper sour crude grades and lower costs for natural gas in the United States compared to Europe.   

The top U.S. refiners have reported in recent days slightly lower profits and refining margins for the third quarter compared to the record-breaking earnings for the second quarter. Yet, the Q3 earnings and refining margins are still much higher than in 2021 and the pre-pandemic levels. 

The strong earnings from refiners and the robust profits oil majors have just reported have prompted renewed criticism from the U.S. Administration, which chastised oil companies—again—and called on them to “lower the prices at the pump for consumers.”  

Refiners and oil producers say that windfall taxes and fuel export bans would be counterproductive and ultimately will only lead to higher prices for consumers.  

Strong Earnings, Bullish Outlook

Valero Energy was the first to report third-quarter earnings last week, and those were above analyst expectations, thanks to strong product demand exceeding 2019 levels and solid refining fundamentals in the U.S. and worldwide. The Refining segment’s operating income soared to $3.8 billion for the third quarter of 2022, compared to $835 million for the third quarter of 2021.   

“Refining fundamentals remain strong as product demand through our system has surpassed 2019 levels, while global product supply remains constrained due to capacity reductions and high natural gas prices in Europe are setting a higher floor on margins,” Valero’s chairman and CEO Joe Gorder said.  

Valero’s refining margin per barrel was at $21.34 for the third quarter, double the $10.07 margin for the same quarter last year. Between January and September, the margin more than doubled to $21.55 per barrel from $8.45 for the same period of 2021. 

Marathon Petroleum, for its part, reported this week an adjusted net income of $3.9 billion for the third quarter of 2022, soaring from $464 million for the third quarter of 2021. Marathon Petroleum’s refining and marketing margin more than doubled to $30.21 per barrel from $14.51 per barrel for the third quarter of 2021. Marathon Petroleum also raised its quarterly declared by 30% to $0.75 per share.  

“So I think at the end of the day, we spend as much time on what we control, and that’s to run as hard as we can, put as much product into the market as we can,” CEO Mike Hennigan said on the earnings call. 

“And whether Asia -- exports come or don’t come, the market needs to supply. So I think that’s why, at the end of the day, we still see this to be a pretty bullish outlook,” Hennigan added. 

“We believe that demand will continue to recover and then whether supply comes from China or from the U.S. market itself is the market just needs it. It’s a supply constrained recovering demand outlook that makes us have this bullish look,” he noted. 

Phillips 66 posted slightly lower adjusted earnings of $3.1 billion for the third quarter, compared with second-quarter adjusted earnings of $3.3 billion.   

“Our Refining business delivered improved market capture this quarter, supported by strong distillate cracks and wider discounts for heavy sour crudes,” Phillips 66 President and CEO Mark Lashier said on the earnings call. 

U.S. Administration Vs. Oil Companies

The strong results from supermajors have prompted renewed criticism from President Biden, who said early this week that if oil companies don’t invest in boosting America’s production and refining capacity, “they’re going to pay a higher tax on their excess profits and face other restrictions.” 

Chet Thompson, President and CEO of the American Fuel & Petrochemical Manufacturers (AFPM), commented on the possibility that President Biden could suggest a Windfall Profit Tax as a measure to address fuel supplies and prices in the United States:

“Once again, the President is more worried about political posturing before the midterms than he is about advancing energy policies that will actually deliver for the American people. A windfall profit tax might make for good soundbites, but as policy, it’s bad for consumers. It’s likely to disincentivize fuel production and make matters worse for drivers.”

Referring to ideas to limit or ban U.S. fuel exports, Phillips 66’s Lashier said on the earnings call, “And they know that they have to proceed with caution because things that they try to do could disrupt the markets even more.” 

Brian Partee, Senior Vice President, Global Clean Products Value Chain, at Marathon Petroleum, said, “I think there’s been broad understanding and engagement that, that’s not the best course of action. Now all that being said, I just can’t speak on behalf of the administration, I think anything is on the table at any time.” 

But CEO Hennigan said, “Number one is I do think the administration understands that a ban would not have the effect that they were originally looking for and instead would decrease inventory levels, reduce refining capacity and actually put upward pressure on consumer fuel prices, which is not what they were intending. So I think given these potential outcomes, it’s my opinion, that the administration would not pursue that path.” 

By Tsvetana Paraskova for Oilprice.com

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