America’s oil refiners are enjoying a surge in profits as inventories of critical fuels are drained across the US, sending prices sharply higher just weeks before the start of the country’s annual driving season.
The sharp rise in the cost of fuel at the pump in recent months has prompted a backlash from the Biden administration, which has warned oil companies against profiteering amid the war in Ukraine and spiralling inflation. Some in Washington have looked to levy windfall taxes on the industry.
But worsening shortfalls of diesel, petrol and jet fuel across the country point to a refining system stretched to its limits by a robust post-pandemic recovery in fuel demand, the loss of Russian supplies after its invasion of Ukraine and refineries running at full tilt.
The tight supplies are likely to deliver months of high prices to consumers and profits to refiners, say industry executives and analysts.
“Right now, our market looks wonderful,” David Lamp, chief executive of Texas-based CVR Energy, a refiner, told his investors last week.
Companies have experienced a big rise in profit margins in recent weeks as inventories have run down and fears of Russian fuel supplies leaving the market have sent prices higher.
“The system is now behaving as though [refining] capacity has effectively run out. This is not easy to solve quickly, especially if demand recovers further,” Martijn Rats, an analyst at Morgan Stanley, wrote in a note to clients this week. “Margins have not just risen, but surged to unprecedented levels.”
Plummeting stockpiles of diesel, which fuels the nation’s construction, heavy industry, food production and railing and trucking goods across the country, are at the centre of the struggle facing the fuel supply system.
Diesel inventories in the US are at their lowest levels since 2006 and prices at the pump are close to $5.50 a gallon, a record high, according to the Energy Information Administration. National average petrol prices are around $4.30 a gallon, just off their recent highs.
“As long as inventories remain low, you would expect that to translate into a very strong refining margin environment,” said Joseph Gorder, chief executive of refiner Valero, referring to the profit margins of refined oil products.
Karim Fawaz, a director at S&P Commodities Insight, said there was little sign of fuel markets loosening, especially as increased travel was expected to buoy demand over the summer months.
“You’re running at historically low inventories, with basically very limited spare refining capacity and you’re staring down potentially Europe phasing out another tranche of Russian diesel imports,” said Fawaz. “It’s difficult to see how the system bounces back in the short term.”
In a sign of the extreme tightness in fuel markets, the so-called crack spread for diesel in the US Gulf Coast — the amount a refiner gets for the fuel it sells above the price of crude — has hovered close to an all-time high of $60 a barrel over the past week, according to data from Refinitiv.
Margins for petrol and jet fuel have similarly risen in recent weeks as traders worry about inadequate supply.
The prospects of a fresh rise in fuel prices hitting consumers already suffering from a 40-year high inflation rate could inflame the political backlash against oil companies.
Darren Woods, the chief executive of US oil supermajor ExxonMobil, which has a large refining business, said he did not think the “very, very high margin environment” was sustainable or “good for economies around the world”.
But industry executives warn there is little excess capacity in the system to lift fuel output and restock inventories, especially after a wave of refinery closures during the pandemic, when demand collapsed and refiners suffered heavy financial losses.
“Even with relatively high utilisation, current refining capacity can barely keep up with demand and is incapable of concurrently increasing global product inventories,” said Thomas Nimbley, chief executive of PBF energy, a major US refiner.
The squeeze on diesel threatened to hit output of other products as refiners were “doing everything in their power to turn every drop of gasoline into a gallon of jet fuel or diesel”, because of the high margins on those fuels, Nimbley added.
That has kept refiners from ramping up output of petrol ahead of the typically busy US summer driving season as they usually do, analysts say.
Even with high prices likely to stick around, few in the industry expect consumers to start cutting back their consumption.
“People that have been unable to travel for a couple of years are ready to go out and take a vacation. And so in our mind, we’ll see very good demand continue for both gasoline and diesel,” said Valero’s Gorder.
Refiners’ share prices have surged on the prospects of a summer of blockbuster profits. The S&P Refining & Marketing index is up nearly 50 per cent this year, even as the broader market has fallen.
“We’re probably as constructive on refining as we’ve been in a long time,” Mark Lashier, president of Phillips 66, one of the US’ largest refiners, told investors last week.