FocusHigh Brent crude costs hammer some US refinery profits

07 November 2011 20:52  [Source: ICIS news]

By Sheena Martin

HOUSTON (ICIS)--Refining profit margins are dropping in the fourth quarter and may cause a loss for refineries that process more expensive grades of crude, an analyst said on Monday.

Analyst Phil Flynn with PFGBest said that the continued drop in gasoline demand was leading to lower gasoline profits. This would result in a loss for Sunoco and other east coast refineries processing more expensive Brent crude.

Gasoline profit margins were $17.60/bbl on 4 November, a 43% drop from $31.09/bbl at the end of September.

Demand for gasoline fell to 8.5m bbl/day for the week of 28 October from 9m bbl/day at the end of September, according to the Energy Information Administration (EIA).

Analyst Patrick DeHaan for said that profit margins for refineries processing Brent will remain in the single digits. The refineries will be more likely to reduce throughput to limit losses from weak margins, he said.

“It wouldn’t be a shock to see some losses in operations on the west coast or east coast, but losses could be limited as refineries in those regions process less crude because of weak margins,” DeHaan said.

Sunoco, a major east coast refinery with capacity of 513,000 bbl/day at its two Pennsylvania refineries, processes more expensive Brent crude, which averaged $23.90/bbl more than West Texas Intermediate (WTI) crude oil during the third quarter. Brent crude averaged $113.64/bbl and WTI averaged $89.74/bbl.

Refining output  is fairly consistent in terms of the gasoline and distillate sales price. The higher feedstock cost pares gasoline and distillate profits. The high Brent price led to a third quarter average profit of $4.89/bbl of output, according to Sunoco’s third quarter 2011 financial report.

Valero rarely processes Brent crude oil and reported a profit of $13.24/bbl at its refineries. Mid-continent had the highest refinery profit of $22.27/bbl. The Mid-continent process mainly WTI and some local crude.

Valero processes primarily Louisiana Light Sweet (LLS) crude (third-quarter average price of $112.21/bbl), Maya crude (average price $98.73/bbl), mid-continent and Eagle Ford crude (average price $89.71/bbl) and WTI crude.

In addition to falling refinery profits, the discounts of the cheaper crude oils processed by Valero are also weakening. Valero’s executive vice president and chief financial officer Mike Ciskowski said the discount for Maya crude to LLS has decreased by $1.38/bbl since the third quarter and the discount of the mid-continent crude mix fell by about 3.50/bbl.

This will hurt Valero’s profit margins, but not to the extent that poor output profits will hurt Sunoco, Flynn said.

By: Sheena Martin
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