U.S. fuel producers enjoy wider margins in 2022 following capacity reductions since pandemic
U.S. fuel refining operations posted third quarter 2022 earnings that showed higher refining margins compared with a year earlier amid tighter supply after the shutting down or re-conversion to biodiesel of many oil refineries that had been operating in 2019.
“Refining margins remained well above the 10-year range due to inflated diesel crack spreads, resulting from expensive natural gas and high demand for diesel,” said Darren Woods, CEO at ExxonMobil, while discussing third-quarter earnings on Oct. 28.
Chevron´s CEO Mike Wirth mentioned on Oct. 28 a “reduction in refining capacity that occurred over the last couple of years in a way we really haven´t seen previously,” according to a copy of the third-quarter earnings transcript call by Motley Fool.
Marathon Petroleum´s CEO Mike Hennigan, speaking on Nov. 1, 2022 during Marathon´s third-quarter earnings discussion, estimated that at least four million barrels per day of refining capacity has come out of the market just over the last couple of years.
Gasoline, jet fuel and diesel consumption still lags the pre-pandemic levels.
The refining capacity was removed at a time "early on when demand was down, but demand continues to recover,” Henningan said.
“We're still not at 2019 levels of demand across all the products, gasoline, diesel, jet fuel. So we're still below, but we are slowly recovering,” he added, according to a transcript of the call by Motley Fool.
Brian Partee, vice president at Marathon for clean products, said that “distillate has been steady and strong” while gasoline has shown that consumers reacted to the higher prices by cutting down on driving.
“Jet continues to perform well, and we're seeing that recover year on year about 6%, but still below 2019 across the platform. And then gasoline is probably the most interesting. We were off slightly from 2021 in Q3, about 2%, and it really correlates to retail prices,” Partee said, according to the Motley Fool transcript.
He said Marathon was optimistic about the current demand outlook.
Mike Wirth, Chairman and CEO at Chevron, said that in addition to Covid-related shutdowns, with plants closing down as demand for fuel fell sharply. Fuel demand fell after the first wave of quick spreading of the pandemic in the U.S. around March 2020 along with reduced international air travel, many drivers home doing remote work from hom, and industries that consume much fuel like the luxury cruise industry battered.
As a result, refining plants were “taken offline after storm damage or operating incidents that are not coming back. We see others being converted to renewable diesel.”
Also, new refining projects that were “in various stages of development, primarily in the Middle East or Asia, slowed down during Covid,” Wirth said.
“The system is tight right now. And what you see is when you have some maintenance that runs along, some unplanned events, as we've seen on the West Coast (…) markets tighten up really quickly,” Wirth added, according to a transcript of the call by Motley Fool.
U.S. Energy Secretary Jennifer Granholm made on Sep. 30 comments related to profitability of refiners while consumers faced high fuel prices. The U.S. government has released in 2022 part of its strategic oil reserves to prevent its citizens from facing fuel price surges amid volatility. Prices of crude oil and related products derived from it have been very volatile, in part because of the Russia-Ukraine war that started early in the year and led to sanctions impacting fuel markets and distribution. Oil producers grouped in the OPEC have also taken coordinated actions that have pressured prices higher during part of 2022.
The U.S. Energy Secretary had said that U.S. energy companies were making “record profits, with refiners and retailers also posting margins that are well above average, while passing the costs on to consumers,” according to a press release at the time from the Department of Energy.
She made a reference to a company that had made as much as $200 million per day in profit in the second quarter to support the argument. It was an obvious reference to ExxonMobil.
Yet in the fourth quarter ExxonMobil beat that figure as it reported in late October net income of $19.7 billion for July-September that would roughly be equivalent to about $219 million per day.
The company shares traded at under $65 per share on Nov. 8, 2021 and then just about doubled to over $112 on Nov. 4, 2022.
In other comments made by ExxonMobil´s CEO Darren Woods, he said that the company is moving toward greater integration of production units at its sites as well as to continue to use trading to increase profit.
“If you look at where we are investing in refining it, it's for sites that have integrated chemicals, lubricants and fast-growing clean fuels business,” Woods said, according to a transcript of the call by Motley Fool.
The comments were reminiscent of those by Shell officials in late 2020 related to envisioning a future with fewer, more integrated plants. Shell officials have also discussed trading to enhance profit, while helping market renewables.
U.S. government officials and refiners held talks in June 2022 over causes for higher-than-anticipated fuel prices.
By Renzo Pipoli