With oil prices being streamed live on bubblevision, it is easy to obsess on the hyperkinetic futures market and forget that the large, integrated companies dominating the industry also make plenty of money from refining and marketing the stuff. “Crude” is much more than just benchmark WTI or Brent, and the gyrations of different varieties, along with a glut of refined products, have rained on the supermajors’ parade.
ExxonMobil’s unpleasant earnings surprise on Thursday, for example, came from a two-thirds drop in refining earnings. The story was much the same at BP, Shell and especially ConocoPhillips, all of which suffered from a convergence in prices of low-quality heavy crude with lighter grades.
Chevron signalled its results will be similarly hit, while pure refiners Valero and Tesoro both swung to losses in the last quarter. With Latin American and Middle Eastern producers paring heavy crude output, expensive refineries suited to handle it are sputtering. And, with demand falling amid plenty of new capacity in Asia, poor utilisation is sapping earnings.
The problem may be secular, rather than cyclical, for refiners in the developed world. The coming years will be particularly tough for US refineries as a result of ebbing demand, competition from biofuels and new emissions rules. Consulting firm Deloitte compares the coming years to the collapse in US refinery profits in the early 1980s, which led to many closures. There were 319 US refineries in 1980 and 149 by 2006.
Meanwhile, utilisation, which peaked at 90 per cent in 1977, fell below 70 per cent by 1981. More recently, utilisation peaked at 93 per cent in 2004 and Deloitte forecasts it will drop to 77 per cent by 2020.
Refining, recently promoted to being a high-flying profit-centre, is back to being a drag. Talk about a crude awakening.END
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