Because of an oil price war on the supply side and coronavirus fears on the demand side, analysts said U.S. refiners can expect to weather low margins and volatile petroleum markets in the near term. But in an echo of 2015, some may benefit from the coming flood of Saudi Arabian crude.
"All else equal, greater OPEC supply in the market should benefit the coastal refiners, who have the ability to process incremental medium/heavy crude," Goldman Sachs analysts wrote March 9. They noted that in 2015, both Valero Energy Corp. and Tesoro, which is now part of Marathon Petroleum Corp., "had a year of sharp outperformance in 2015 versus the [S&P 500] and the Energy index."
But the analysts offered caveats. "Unlike 2015, oil prices first moved lower due to demand destruction as opposed to crude oversupply, making for a tougher backdrop for product margins to improve," they said. "Second, for Mid-Continent refiners, we would expect shale growth to continue to slow, weighing on crude differentials and the near-term economics of midstream investments."
Before the price war started, PBF Energy Inc. Chairman and CEO Tom Nimbley warned during the company's fourth-quarter 2019 earnings call that lower margins could persist as long as coronavirus spreads. Now, analysts say the flood of Saudi Arabian crude oil supply threatens to narrow crude oil discounts from which inland U.S. refiners had benefited.
"Brent oil prices fell more steeply than [West Texas Intermediate] oil prices, and WTI more steeply than Western Canadian Select," Moody's analysts said in a March 10 report. "The narrower margins threaten a onetime hit to profit margins for refiners with higher-cost inventory." In addition, the Moody's analysts echoed Nimbley's observation that the coronavirus effect would blunt the impact of marine fuel sulfur standards, known as IMO 2020, which had been expected to boost the profitability of refiners.
"The IMO 2020 restrictions on the sulfur content in marine fuel will provide less benefit to refiners' distillate margins that we had previously expected," the analysts said.
Goldman Sachs analysts said March 8 that petroleum product markets would become volatile "given the diverging forces of collapsing demand and surging excess crude supply. After a likely rebound on the first days of the crude price collapse, cracks should retrace given the ongoing demand shock. … Once refiners cut runs, we would then expect the crude surplus to prevail and help margins recover even if the demand recovery remains shallow."
On March 9, Tudor Pickering Holt & Co. analysts noted a 2.9% increase in U.S. gasoline demand in 2015, after oil prices crashed during 2014's price war. "On the other hand, we expect low prices to keep inland US crude [differentials] tight in the medium term due to the likelihood of falling US production growth," the analysts wrote. Those with the most exposure to U.S. Gulf Coast markets "stack up well," the analysts said. "Most at risk would be pure inland refiners."
Inland refiners include Delek US Holdings Inc., HollyFrontier Corp. and CVR Energy Inc., who all underperformed Wall Street expectations in the fourth quarter of 2019.
That group may not be able to count on consumers responding to low gasoline prices. Regarding the crude oil market, Mizuho analyst Paul Sankey said March 9, "With no price elasticity of oil demand right now because of coronavirus, price elasticity of supply is the only question."