Daily Management Review

Declining Refinery Profits Stare in the Face of Big Oil Companies


Declining Refinery Profits Stare in the Face of Big Oil Companies
Lowering of demand due to easing of summer gasoline consumption makes analysts and executives worried about the prospect of lower refining profits in the second half of the year.

The refineries of large oil companies had been churning out profits despite the slackening global crude prices. But that too now seems to be lost as analysts predict that the lowering of profits from the refineries would severely strain the coffers of the large oil companies.  

The alert had been sounded last month by Bob Dudley, chief executive of BP PLC, one of the world’s biggest refiners, who claimed that the company’s profits from the oil refineries would not last for long.

“Actually, we see some of those correcting,” Dudley had told analysts.

Last month there were reports of “fissure” in the strong refining environment that has prevailed this year by the International Energy Agency, a Paris-based watchdog for the world’s biggest consuming countries.
Citing sharply falling margins in the U.S. and Europe, analysts from Jeffries warned on Friday that “signs of weakness have appeared more broadly” for refiners over the past week. The warning noted that the global average profit margins from refineries had come down to 15% in the preceding week.
Even as the analysts served warnings, they also said that the fall in profits from refineries would not be as steep and as abrupt as had been the case with oil itself at least in the near terms.  The weak prices of oil and higher consumption is help bolster the performance of the refineries and the downstream businesses of major oil companies are likely continue to perform better than they have done for several years.

However analysts are speculative about headwinds that are getting build especially in Europe.

According to the IEA, while the stocks of gasoline and diesel are near record highs in Northwest Europe, overcapacity in the markets is plaguing the European refiners who are also faced with new competition.
Raising the possibility of a glut, Europe and Asia are being fed with massive volumes of diesel and other fuels sourced from the new Saudi Arabian refineries. On the other hand, low domestic demand has forced Russia to export more diesel to Europe.

20% of its refining capacity is planned to be cut by Total SA by the year 2017 as the company’s Chief Executive Patrick Pouyanné said the industry remained in a “crisis” in Europe.

Similar steps by other large oil companies of Europe are anticipated by analysts.
“If we’re looking out to 2020, I still expect to see some closures in Europe. I don’t think the pressure has gone away for European refiners,” said Steve Sawyer, downstream consultant at FACTS Global Energy.
As major companies like Exxon Mobil Corp,. Royal Dutch Shell PLC and BP grapple with another plunge in crude-oil prices, a fall in the refinery profits would put them in a very tight spot, say analysts.

These large companies have been able to circumvent previous market crashes as they do almost every part of the oil production process themselves – including exploring for oil, pumping it from the ground, refining it into products like gasoline and then selling it straight to consumers at thousands of filling stations.

The large oil companies benefit from the low costs of raw material for their refineries – crude oil, as the pump it themselves, and churn out profits from the refining activities when the international markets fall.
Hence in a time when the crude prices are at historic lows, a dent in the refinery earnings would nearly cripple these large companies forcing shutting down of refineries, say analysts.

(Source: www.wsj.com)