Oil prices aren’t affecting all energy, just ask refiners

Getty Images

Getty Images

Low oil prices are not hurting the entire energy sector as U.S. refiners are reporting record profits. Valero Energy, Phillips 66 and Marathon Petroleum have all posted their best quarter in three years, Tesoro Corp. just reported a record profit for its third quarter.

Phillips 66, the largest U.S. refiner by market share, saw its shares rise 3 percent on Oct. 30 to $89.05, a record high. An index of the four companies is up 26 percent for the year while the broader Standard and Poor’s 500 Energy Index has lost 14 percent over the same period.
“Refining is one of the better places to be in right now. They have the luxury of low crude feedstock prices and high demand for their products.” according to Carl Larry, head of oil and gas for Frost & Sullivan LP in Houston. Crude prices are down by more than half since their 2014 peak, but drivers in the US are logging records in driven miles.

Source: Bloomberg

Source: Bloomberg

The above chart shows that profit margins for converting oil into gasoline have reached record levels. In stark contrast, crude prices have fallen, and demand driven by driving has risen. The Gulf Coast, where roughly half the nation’s refineries are, the margin has averaged $12.21 a barrel this year. As a result, refiners are processing as much crude as possible. In the last week of July, 17 million barrels per day were processed, a record number. Tesoro has reported that during the third quarter its plans ran at 101 percent of their capacity.

Furthermore, the good times are expected to last according to Harold York, vice president of integrated energy research at consulting company Wood Mackenzie Ltd. Margins might weaken somewhat, but crude processing will keeping reaching highs according to him. The current margins are very different from where they were less than four years ago when Marathon reported just $ 0.39 per barrel for one-quarter.

The refining party won’t be stopping anytime soon, said Harold York, vice president of integrated energy research at consulting company Wood Mackenzie Ltd. Margins may weaken next year from this record level, but they will still be good enough for plants to keep operating at high rates.

Refining is a cyclical business and less than four years ago Marathon’s refining margins were just 39 cents a barrel for a quarter. Since refining is cyclical, companies are looking to use the current profits to diversify, mainly by buying pipelines. Also, with other assets like storage facilities as a safety net because they are less impacted by commodity prices. Valero might exercise an option it has for a 50 percent stake in the $900 million Diamond oil pipeline owned by Plains All American Pipeline LP. Marathon wants to buy MarkWest Energy Partners LP, a natural gas gathering and transporting company.

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