Sunday, August 12, 2007

Changing Oil Refining Market?

The excerpts below from the WSJ discuss the possible changes coming in the refining market.

One of the most profitable periods ever for the refining industry may be coming to an end.

An increasing number of troubled refineries are coming back to full capacity at a time when greater supplies of gasoline and other fuels are coming from overseas. As a result, U.S. consumers have seen fuel prices ease.

At the same time, crude-oil prices are at higher levels since the beginning of the year, though they have fallen from a new record reached just last week. The two market trends have squeezed the profit that refiners get from turning oil into gasoline, diesel or heating oil.

Lower gasoline prices mean good news for American consumers, who face uncertainty from a weakening housing market. But the shifts underscore the roller-coaster nature of the refining industry, which for years suffered from low margins and a lack of investment in aging facilities.
Refining margins -- or the difference between the price of the crude oil that refiners buy and the price of the products that they make from it -- remain higher than their historical average, giving refiners more cash to manage the ups and downs.

Still, narrowing margins could put to the test their recent efforts to make their systems more flexible to better adapt to the whims of the market.

In the second quarter, lower imports and an unusually high number of maintenance projects decreased gasoline inventories, generating plump earnings for refiners. . . . . Major integrated oil companies also benefited from the refining bonanza.

The benchmark refining margin, which measures the difference between West Texas Intermediate, or WTI, crude and products refined in the Gulf Coast, went from $23.58 a barrel in the second quarter to $7.84 currently, according to Oppenheimer. Oil finished yesterday at $71.59 a barrel in New York Mercantile Exchange trade, up 17% so far this year.

Imports of gasoline and blending components, which averaged less than one million barrels a day from February to April, averaged 1.3 million in June, as refiners around the world shipped product to the U.S. to take advantage of higher prices.

Most refiners are also counting on margins going back up soon. The lower fuel prices will attract fewer imports and reduce inventories, which will in turn result in higher prices, they say. Current inventory levels, although plumper than at the beginning of the year, remain at historical lows. This means that any disruption, from a malfunction at a refinery to a hurricane, would send prices higher and increase margins, says Ann Kohler, managing director of energy research at Caris & Co.

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