America’s gasoline producers can run, but they can’t hide from a plunge in refining profit margins that sanctions against Venezuelan crude would only worsen, analysts said.
The biggest U.S. refiners are expected to report strong fourth-quarter earnings thanks to profits from diesel processing in a strong U.S. economy, as well as a drop of about 40 percent in crude prices. But that’s all expected to change this year as gasoline stockpiles surge, and a shortage of heavy crude from Venezuela wouldn’t make refiners’ lot any easier.
“It’s really the first quarter that’s the big concern among investors right now,” Matthew Blair, an analyst at Tudor Pickering Holt & Co., said Thursday in a phone interview. “We’ve lost some of those crude differentials, diesel’s come down a little bit and gasoline is super weak.”
The spread between benchmark gasoline prices and oil futures, an indication of how profitable it is for refiners to produce the motor fuel, plummeted to as low as $5.693 a barrel on Thursday, the narrowest since October 2013. Demand for gasoline in the U.S. has flatlined over the past two years while output is up. Refiners have been focused on benefiting from better demand for diesel in a strong U.S. economy.
But the combination of a shale boom, which contributes lighter oil, along with output cuts from OPEC and Canada, which means less heavy oil, compounds the problem. That’s because light oil yields more gasoline than diesel, so as fuel producers seek to ramp up diesel production, they are piling up on excess gasoline. At the same time, a scarcity of heavy crude is making it more expensive and less lucrative to process.
Add on top of that the possibility of U.S. sanctions on Venezuela’s oil, which is also heavy, and the refiners are in a squeeze.
“The crude quality mismatch will grow even bigger,” Paola Rodriguez-Masiu, an analyst at Rystad Energy, said Thursday in a report. “Venezuela is very important for oil markets, not so much the sheer volumes but rather for the quality of their crude. Sanctions would make U.S. Gulf Coast refiners the biggest loser.”