Major U.S. fuelmakers beat Wall Street’s earnings expectations in the fourth quarter on strong refining margins and operating performance, and they predicted profits would rise again this year thanks to global demand growth.
For 2023, three of the biggest U.S. independent refiners – Marathon Petroleum , Phillips 66 , and Valero Energy – posted combined adjusted earnings of $25.7 billion. While that beat forecasts, it was down from combined profits of $33.9 billion in 2022, when market disruptions from sanctions on Russia’s energy industry drove record earnings.
Shares of Marathon are up 11% year-to-date, Phillips 66 is up about 9% and Valero has gained 8%, far outpacing the S&P 500 energy sector’s slight decline so far this year.
“Investors have turned positive on refiners and metrics, especially for gasoline demand, look good,” said Matthew Blair, a refining analyst at Tudor, Pickering, Holt & Co, in an interview.
Marathon posted a profit of $2.24 per share last quarter, while Phillips 66 earned of $3.09 per share and Valero earned $3.55 per share.
Refiners benefited from lower prices for U.S. crude oil during the quarter after Houthi rebel attacks in the Red Sea drove up freight costs. Crude prices are the greatest cost for refiners who process oil into transportation fuels, heating oil and other products.
“We had a period of time where you could export from the U.S. Gulf Coast to Northwest Europe crude in the low $2 a barrel range. That spiked to $6 a barrel,” said Gary Simmons, chief operating officer for Valero.
“For our system, that is an advantage because it gives us a crude cost advantage versus our global competitors,” he added.
Valero saw margins of $33 a barrel for ultra-low sulfur diesel in the U.S. midcontinent and north Atlantic and $24 a barrel on the Gulf Coast during the quarter.
For its part, Phillips 66 saw margins of $14.41 a barrel in the fourth quarter, down from $19.73 a barrel the same period last year as fuel prices weakened.
The company increased its yield of clean products by 2% to its highest levels since 2017.
U.S. crude is at roughly a $5 a barrel discount to the European Brent benchmark. The discount is expected to remain wide if tensions escalate in the Middle East.
GLOBAL DEMAND OUTLOOK
Globally, gasoline demand rose by 3% and distillate demand grew by 2% throughout the year, according to Brian Mandell, executive vice president of marketing of Phillips 66. Global gasoline demand is expected grow by 1% in 2024 while distillate demand will grow by 0.5%, he added.
The bump in global demand growth will keep encouraging U.S. refiners to focus on exporting fuels. U.S. petroleum product exports totaled nearly 6.0 million barrels per day in the first half of 2023, the highest ever for the first six months of a year, according to the U.S. Energy Information Administration.
The U.S. has also increased distillate exports to Europe, which previously imported sanctioned Russian diesel and heating oil. U.S. distillate fuel oil exports to Europe averaged 138,000 bpd in the first half of 2023 more than double the 56,000 bpd in the first half of 2022, according to the EIA.
Still, U.S. fuelmakers must compete with an additional 1.5 million barrels a day of global refining capacity to come online this year, more than the projected 1 million bpd of oil demand growth projected globally.
Startups of some of the biggest new refineries in the world, such as the 650,000 barrel per day Dangote refinery in Nigeria, should begin running at higher rates in the second half of 2024.
Any delays in such projects could squeeze supply/demand balances, said Valero’s Simmons.
Gasoline and diesel inventories, currently at or below their five-year averages, could also tighten as several large U.S. refineries shut units for heavy maintenance in the first quarter, executives said. This could boost fuel prices.
“We’d anticipate draws through the spring maintenance season that should take inventories even closer to last year’s levels,” said Mandell of Phillips 66.
