Oil Refiners' Profits Dip Amid Demand Woes, Competition Up

Key Takeaway

• Marathon Petroleum, Phillips 66, and Valero Energy face their weakest quarterly profits in two years amid a gloomy supply-and-demand outlook.
• Refining stocks surged early in the year but fell up to 9% since April due to shifting interest-rate expectations and economic growth concerns.
• Despite current challenges, Wall Street remains bullish on independent refiners with a buy-to-sell-or-hold ratio averaging 68%.

Refiners Face Earnings Pressure

US oil refiners, including Marathon Petroleum Corp., Phillips 66, and Valero Energy Corp., are bracing for their weakest quarterly profits in two years as they navigate a challenging supply-and-demand landscape. Despite starting the year strong, with crack spreads supporting margins, these companies have seen their stock prices decline since April due to shifting interest-rate expectations and concerns over economic growth. The upcoming earnings reports are highly anticipated, with Valero leading the charge, followed by Phillips and Marathon. These reports will provide insight into how the largest independent US refiners are managing the current market dynamics.

Demand Outlook and Capacity Concerns

The demand for gasoline and diesel is currently below normal levels for this time of year, casting a shadow over the upcoming summer-driving season. Additionally, about 1 million barrels of new daily refining capacity are expected to come online later this year, further intensifying competition among US fuel makers. Despite these challenges, Wall Street remains optimistic about the sector, with a buy-to-sell-or-hold ratio averaging 68% among the top independent refiners.

Geopolitical Tensions and Market Volatility

Geopolitical tensions, particularly Ukrainian attacks on Russian refineries and Red Sea shipping disruptions, have created global supply gaps and contributed to volatility in crude oil prices. This volatility presents both challenges and opportunities within the energy sector. Morningstar strategist Stephen Ellis highlights the potential for finding "selective bargains" in energy stocks, despite the sector's recent performance near all-time highs. Ellis's top picks include companies like Enbridge, SLB, TC Energy, APA Corp, and ExxonMobil, which he views as having durable competitive advantages.

Street Views

• Brett Gibbs, Bloomberg Intelligence (Neutral on US refiners):

  "US refiners got off to a hot start in 2024 as federal-fund rate expectations bottomed out in mid-January... the focus is setting in on the shape of domestic demand."

• Austin Lin, Wood Mackenzie Ltd. (Bearish on US fuel makers):

  "Later this year, about 1 million barrels of new, daily refining capacity is expected to come online even as gasoline demand expands by less than 1%, that will increase competition for US fuel makers."

• Jason Gabelman and Michael Laupheimer, TD Cowen (Bullish on global supply gaps affecting refineries):

  "Ukrainian attacks on Russian refineries along with Red Sea shipping disruptions have created global daily supply gaps to the tune of hundreds of thousands of barrels."

• Nitin Kumar, Mizuho Securities USA (Neutral questioning sustainability of crack spreads):

  "Are these cracks sustainable? Are they seeing strength in demand? Are they seeing any softness in US markets, especially after the turnaround season ended?"