NEW YORK (Reuters) - U.S. refiners’ months-long windfall from cheap and plentiful crude showed further signs of running out of steam on Wednesday as a second refinery, Delta Airlines’ Monroe Energy, prepared to cut output and another dumped unwanted crude.
With companies taking frantic measures to combat declining profits as inventories rocket to fresh record highs and sluggish winter demand hurts profits, traders speculated that further cuts may be on their way.
Monroe Energy will cut output by 10 percent at its 185,000 barrel-per-day refinery outside of Philadelphia, a source familiar with the plant’s operations told Reuters on Wednesday.
A day earlier, top U.S. independent refiner Valero Energy Corp was the first to capitulate to worsening market conditions with a 25-percent cut to gasoline output at its 180,000 Tennessee refinery.
While those cuts are only a tiny portion of 18 million bpd U.S. refining capacity, turning off the spigots represents a dramatic shift from a few months ago when refiners were running at full tilt to take advantage of high margins and a surge in demand.
On Wednesday, U.S. gasoline crack spreads, a leading indicator of refinery margins, surged almost 30 percent for their best day in over a year on the news.
But few analysts expect those gains will last - more refiners may choose to cut output rather than flood the market with products already at historic levels.
“The good old days are gone,” said Phil Flynn, “It’s a sign that refiners are not just going to spin out gas like hot cakes like they have been over the last couple of months.”
One such company could be U.S. refiner Phillips 66, which offloaded crude for immediate delivery in Cushing, Oklahoma, at distressed prices on Wednesday.
Traders speculated the unusual move was advance warning of looming output cuts. The company declined to comment.
The cuts could also spell more trouble for benchmark oil prices and producers, which have relied on high refinery margins to help spur consumption and production.
U.S. prices slumped more than 2 percent on Wednesday, teetering close to 12-1/2-year lows hit last month, as data showed stockpiles at Cushing, the main U.S. delivery point, hit fresh record highs even as total stocks fell unexpectedly. [O/R]
The prolonged plunge in crude has boosted profits for refiners, who use oil to make products like automotive and jet fuel.
Last March, refinery crack spreads, a leading indicator of profits from gasoline and distillates, were as high as 33 percent.
Since then, they have more than halved to around 12 percent as product inventories have hit records and prices at the pump continue to fall. That’s close to five-year lows.
This week, refinery margins in the Midwest turned negative.
Wholesale gasoline in Midwest markets is already at deep discounts to U.S. gasoline futures selling for less than a dollar a gallon, and traders said it could fall more in some states where pump prices are the cheapest in 12 years.
Reporting By Jarrett Renshaw; Editing by Chizu Nomiyama, Meredith Mazzilli, Josephine Mason and Bernard Orr