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Oil and Gas

U.S. oil refiners set for record quarter but demand slide in July dims outlook

July 26 (Reuters) - U.S. oil refiners are expected to post gangbuster second-quarter earnings as robust worldwide fuel demand and perilously low inventories charged up margins, but weaker demand in July and recession worries clouded the outlook for future results.

“Investors are more concerned about potential negative earnings revisions for the refining segment if the U.S. does enter a major recession versus record refining segment earnings” in the second and third quarter of 2022, Credit Suisse analysts wrote on Monday.

Profits in the April-to-June period also got a boost as operable refining capacity declined and demand for U.S. fuel surged due to Western sanctions on Russian oil products. The seven major U.S. independent refining companies are projected to post combined earnings per share of $5.97, more than double $2.04 a year earlier, according to IBES data from Refinitiv.

Profit margins hit records last quarter for makers of gasoline and distillates like diesel, jet fuel and heating oil. Gulf Coast gasoline margins skyrocketed to $40 a barrel from the 2017-2019 average of $11, with per-barrel diesel margins jumping to $55 from $13, according to energy consultancy Tudor Pickering Holt.

Valero kicks off refinery earnings on Thursday; Phillips 66 reports on Friday, and Marathon Petroleum next week.

TURNING A CORNER

Refiners have come a long way since the early days of the coronavirus pandemic, when profits plunged with fuel demand.

In April 2020 the market capitalization of PBF Energy sank below $1 billion, the amount the refiner spent to acquire the 157,000-barrel per day Martinez, California plant a month before lockdowns.

The refiner sold assets and raised more than $1 billion in debt offerings, helping improve its credit rating. Fitch last month upgraded PBF’s long-term rating to BB- from B+ after the company said it would redeem $1.25 billion of senior secured bonds with cash.

“PBF Holding is benefiting from historically strong refining margins due to the impact of the Russian-Ukraine war, increasing demand from the strengthening economy, declining product imports, and below normal product inventory levels,” Fitch said in a note.

The refiner is expected to post quarterly earnings of $7.60 per share, Refinitiv estimates. Shares of PBF rose 27% during the second quarter, boosting its market capitalization to $3.4 billion.

MARGINS WANING

U.S. refining capacity peaked in April 2020 at just under 19 million barrels per day (bpd), but refiners shut several unprofitable facilities during the pandemic. As of March, refining capacity was 17.9 million bpd, and other closures have been announced since.

High U.S. gasoline prices are starting to crimp demand, threatening margins for refiners. Gasoline product supplied, a proxy for demand, was about 8.5 million barrels per day, or about 7.6% lower than the year-ago period, according to the U.S. Energy Information Administration.

The U.S. refining crack spread CL321-1=R has fallen to $39 from nearly $60 in June, still well above seasonal levels. The national average price of gasoline has dropped to $4.36 per gallon from an all-time peak of $5.02 reached in mid-June, according to the American Automobile Association. (Reporting by Laura Sanicola; Editing by David Gregorio)

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