demand for gasoline and improving demand for diesel could
help reduce inventories, especially in late 2017 and into 2018.
“Production could slow among refineries that produced at
90% of capacity or higher in 2016, in some cases to perform
postponed maintenance. High oil inventories will also support crack spreads through 2018, though not at levels much
higher than in 2016,” Moody’s said.
Meanwhile, the cost of complying with US renewable fuel
standards (RFS) has decreased since the new US administration came into office.
“Prices have dropped for renewable identification numbers
(RINs)—federal credits related to RFS compliance that US refiners can earn, buy or sell—dramatically easing their strain
on refining margins. Trading prices of $1/RIN in the summer of 2016 have fallen to 35-50¢/RIN since then, benefiting
merchant refiners such as Valero Energy and CVR Refining,”
Fewer advantageous crude options will continue to hurt refiners on the US East Coast, while US West Coast refiners such as
Tesoro Corp. will benefit from a tight product supply-demand
balance in their market.
Still, near-term profits will improve for East Coast refiners
such as PBF Holding, with less competition from European imports. Tight crack spreads will discourage brisk production at
Europe’s generally less efficient, smaller and less complex refining operations, which also face increased competition from
Middle East capacity expansions, Moody’s said.
US Midcontinent refiners close to shale production, such as
HollyFrontier, will benefit from a potential partial reemergence
of discounted crude prices, given their proximity to the region’s
quickly increasing production.
The large, complex US Gulf Coast refineries, representing
more than half of US capacity, will continue to benefit from
favorable light, heavy, and sour crude differentials, especially
against Canadian crudes requiring more complex processing.
Risks to the outlook
However, a sudden drop in demand, or demand that does
not keep up at least with incremental refinery production,
would increase the industry’s risk.
“We would likely change our outlook to negative if the
peak US driving season fails to support crack spreads, inflating gasoline inventories again,” Moody’s said.
“Weaker demand for gasoline and distillates in China, In-
dia, the US, or the Middle East would depress North Ameri-
can crack spreads, and West Texas Intermediate crude pric-
es rising above prices for Brent from Europe would directly
hit profitability for North American independent refiners.”
On the other side, Moody’s would consider a positive
outlook if the US and Asian diesel and distillates markets
surged, and if increased gasoline demand led to stronger
proportions during the second and the first quarter of 2016,
“The outlook for hedging activity seems poised to plateau
Moody’s: Outlook n North
or decline,” McConn explained. “At this early stage of the
year, the peer group already has a higher proportion of its
liquids production hedged than the prior 2 years with 26%
in 2017 vs. 24% and 23% in 2016 and 2015, respectively.
The same is true for gas with 42% in 2017 vs. 32% and 28%
McConn said, “As companies consider adding new hedg-
es, OPEC comments and plans are likely to play a larger-
American R&M revised to stable
Moody’s Investors Service has changed the outlook to stable
from negative on the North American and EMEA (Europe, the
Middle East, and Africa) regions refining and marketing (R&M)
businesses. This outlook reflects Moody’s expectation for the
fundamental business conditions over the next 12-18 months.
According to Moody’s most recent outlook, the R&M business’ earnings before interest, tax, depreciation, and amortization will rise 2-4% in 2017 and a further 1-3% in 2018. This
represents a period of modest growth that follows a very lackluster 2016, when high inventories and utilization rates had
narrowed margins dramatically.
While these disadvantages linger today, crack spreads—
a crucial factor in the refiners’ profitability—will average at
or above 2016 levels into early 2018, as seasonal demand for
gasoline rises and distillate demand improves with increasing
drilling and manufacturing activity, Moody’s said.
Moody’s still expects very high gasoline demand in 2017-18
after a record 2016, despite sporadic modest declines.
Gasoline demand within the Organization for Economic
Cooperation and Development “faces long-term secular de-
cline as vehicle fuel efficiency improves and biofuel use in-
creases,” Moody’s said. “Still, lower gasoline costs have
changed near-term driving habits, especially in North Ameri-
ca, with sales rising for less fuel-efficient vehicles.”
According to Moody’s outlook, gasoline demand will stabilize before the peak 2017 summer driving season, following
5-7% declines in early 2017 amid bad weather and rising fuel
prices. US miles driven will rise by 1-2% in 2017, while gasoline demand will decline by 2-3%—not enough to worsen
crack spreads beyond the unusually weak levels of 2016.
Product inventories, RINs
US refined product inventories remain high, limiting refining margins in 2017, but production cuts and continuing high