FEATURE: US refiners expected to report record Q2 results on low supply, high demand

Record-high refining margins will provide US refiners with stellar second quarter results as tight supply combined with strong demand raised the price of gasoline and diesel to record levels, according to analysts.

However, the fall-off in prices and the subsequent weakening of refining margins so far in the third quarter have some analysts zeroing in on the bigger economic picture and what it means for refined product demand.

"There are two things the market is watching very closely in demand numbers to assess this risk: 1) demand destruction associated with higher prices and 2) Any sign on demand weakness associated with lower economic activity (recession)," wrote Credit-Suisse analyst Manav Gupta in a recent research note on the US refining industry.

US gasoline prices soared to peak at $5.01/gal on June 14. However, prices since have fallen to average $4.428/gal on July 21, the lowest level since May 12, according to Patrick De Haan, analyst with GasBuddy which tracks real-time sales of gasoline across the US and Canada.

Diesel prices have also dropped, down 31 cents/gal from its June 21 peak to average $5.51/gal on July 21, GasBuddy data showed.

Though consumers and companies are benefiting from lower refined product prices, concerns over the larger macro economic picture still loom.

While Gupta characterizes demand destruction as a major risk, he said the "market is a lot more worried about lower demand associated with onset of a recession which will likely impact both diesel and gasoline demand."

"If we do enter a major recession, global refined product demand could contract by 4-5% (2008 playbook) and that would change the market dynamics, where refined products would become oversupplied vs. undersupplied," he added.

Has this summer's gasoline demand peaked?

Most recent Energy Information Administration data shows that US gasoline demand has remained tepid for the past two weeks, averaging 8.4 million b/d for the week ended July 15. However, many analysts chalk that up to a drawdown by retail marketers from stocks built up ahead of the US July 4 weekend clouding the numbers.

"According to Google Mobility data, whereas discretionary driving has been in year-over-year decline, work-related driving continues to grow. This represents a solid base of support for demand because work-related driving represents about 30% of all driving," said Platts Analytics in a recent research note.

Platts Analytics expects gasoline "demand should improve from the last two weeks' unsustainable lows, especially in light of lower pump prices, increases in work related driving, and a small improvement in consumer sentiment in July."

Other analysts also see an uptick in gasoline demand, with GasBuddy data showing a 1.5% increase in demand in the week ended July 15 from the week earlier.

However, while lower gasoline prices encourage increased demand, it also has weakened refining margins. US Gulf Coast WTI-MEH cracking margins without RINs – the Environmental Protection Agency's renewable credits -- so far in the third quarter are averaging $25.70/b compared with the second quarter's $35.14/b, according to Platts Analytics margins.

RINless USGC Arab Medium coking margins have also tumbled from the second quarter average of $28.09/b to $18.62/b so far in the third quarter.

The return of refineries from planned work in July and August are expected to increase supply of both gasoline and diesel, resulting in lower prices and softer margins from second quarter levels.

Platts Analytics expects July and August US refinery throughput to average 16.5 million b/d, up from the 15.6 million b/d in April.

"Downtime is expected to moderate in July and August, but then move up seasonally," said Platts Analytics.

"The wild card, as usual, is the potential for hurricane disruptions during the summer and fall in what is expected to be a very active hurricane season," the note said.