U.S. refiners set for big profits as pump prices soar

NEW YORK (Reuters) - U.S. refiners' glittering profits are expected to jump this year as robust demand growth from motorists and recurring snags at aging plants push fuel prices near record territory, analysts said.

Gasoline pump prices shot above $3.00 a gallon on Friday, about a nickel below the all-time peak, according to the AAA travel group, as the nation's creaking refining system of some 130 aging complexes strains to meet demand.

"The profit outlook is incredible, the refinery margins are significantly higher than last year or the past three years," Fadel Gheit, an analyst with Oppenheimer& Co., told Reuters.

"It would be safe to say that if margins don't collapse from here, the refiners will probably do 20 to 30 percent higher profits this year than last year," added Gheit.

Already for the first quarter, top refiner Valero Energy Corp. (VLO.N) last week posted higher-than-expected earnings. This week, Sunoco Inc. (SUN.N) and Tesoro Corp. (TSO.N) both said earnings more than doubled.

Peter Beutel, an analyst at Cameron Hanover, said U.S. refinery profit margins, on average, are higher than they were after the 2005 hurricanes shut in 25 percent of U.S. fuel production.

"With supplies tight as a drum and refineries trying -- unsuccessfully -- to restart refining units and rebuild stocks, the only hope is lower demand," Beutel said in a recent note.

Government data on Wednesday showed U.S. gasoline inventories fell for the 12th consecutive week, to reach 193 million barrels, down 15 percent from February levels, as U.S. refinery output remained sluggish.

"Until stocks post a significant increase or are adjusted higher at a later date, a low level of supply will tend to keep the market extremely responsive to any refinery headlines capable of tightening the balances even further," said Jim Ritterbusch of Ritterbusch & Associates.

Oppenheimer's Gheit said gasoline demand remains strong despite rising high pump prices while demand growth for diesel is also much stronger. The latest data from the U.S. government showed gasoline demand running 1.6 percent higher than a year ago, with demand for distillates running 5.4 percent higher.

"Refining margins are high on strong demand and tight supply due to planned and unplanned turnarounds, which are taking longer and costing more to complete," he said.

He called the number of refinery problems "alarming".

"Many days we have multiple problems," he said. "No refinery operates smoothly, these are old facilities which handle very flammable liquids, so they will be susceptible to accidents, just by the law of averages," he said.

Meanwhile, the refiners themselves are enjoying a field day in profits.

On the West Coast, profit margins are at an unheard of $39.88 per barrel of crude oil processed, as the area suffered more refinery glitches than the rest of the country. Margins in the Gulf Coast are at $25.28 a barrel, the Midwest at $28.38 and the East Coast $17.31, Gheit added.

Barring any drastic changes in fundamentals, Gheit estimates that 2007 margins will be about 10 percent higher in the Gulf Coast from last year, 15 percent higher in the Midwest and 33 percent higher on the West Coast.

A wild card, however, is if the U.S. economy slows down. That's because demand for oil products will follow and the combination of lower demand and the return of refiners from outages, will cause supply to increase, cooling prices.

"That will balance the market and bring margins lower," Gheit told Reuters.