New York (Platts)--15Jan2008

The already shaky 2008 US refining environment looked grimmer on Monday,
as West Coast refiner Tesoro announced weak margins had forced it to cut runs
and market watchers warned of troubling indicators.

Tesoro said it began reducing run rates this month due to poor margins,
and forecast its first quarter throughput would average 545,000-595,000 b/d
out of total capacity of 660,000 b/d. The company also noted run rates will be
adversely affected by lower throughput at its Golden Eagle refinery in
California due to commissioning of a new delayed coker.

Market indicators on Tesoro's Web site showed an average West Coast 3:2:1
crack spread of $7.58/barrel for the week ended January 11, down $6.44/b from
the week before and $9.45/b from the first-quarter 2006 average.

California gasoline blendstock CARBOB is particularly weak, according to
Tesoro's data. The company reported a San Francisco CARBOB margin of $4.67/b
for last week, down $7.52/b from the week ended January 4 and down $10.72/b
from the first-quarter 2006 average.

An oversupply situation has created a record price discount for CARBOB
versus its futures counterpart, market sources have noted.

"When all is said and done, it would not be a surprise to find that
petroleum consumption in California in January 2008 is down as much as 5% from
the year before," economist Phil Verleger said in a report Monday. He said
while it is risky to apply California data to the rest of the country, "the
signs of serious slowdown are accumulating."

"Today, refining profits are negligible--if they exist at all," Verleger
added. It is not known if other refiners are cutting runs at this point. A
Valero Energy spokesman said the US' biggest refiner will update its first
quarter guidance during its January 29 earnings conference call.

US West Coast refining margins dropped by 43% last week versus the prior
week to $9.12/b, according to analyst Mark Flannery at Credit Suisse. He said
in a Monday report that most US refining margins were lower despite a dip in
crude prices. "Although crude prices declined by [about] 4.3% [week-on-week]
given rising economic concerns, weaker product prices were a recurring theme
taking margins in most regions lower," said Flannery.

ANALYST FORESEES NO US DEMAND GROWTH IN 2008

He said Midwest refining margins dropped by 26% to $5.71/b last week,
while Gulf Coast margins were 21% lower at $6.40/b. Northeast margins declined
by 10% to $8.27. "The Rockies saw the only increase this past week, with
margins up 56% or $3.73/bbl to $10.43/bbl due to firmer product prices," he
noted.

In a low-margin environment, every bit of demand counts. That is why one
analyst's assertion on Monday that there will be no US products demand growth
this year stood out.

"We expect no growth in US refined product demand," analyst Eitan
Bernstein with Friedman, Billings, Ramsey said in a report. "US crude oil and
product demand growth has been very modest the past few years and, during
2007, increased by just 0.3%. Given record-high international crude oil prices
and expectations for a major economic slowdown, we assume no growth in demand
this year."

The lack of growth includes gasoline demand, he said. "I'm assuming zero
[growth] across the board," Bernstein seperately told Platts.

His report contradicts the 0.8% US gasoline consumption growth rate in
2008 and 1% growth in 2009 expected by the Energy Information Administration
in its latest Short-Term Energy Outlook.

Bernstein said supply is "in the driver's seat" for refiner earnings this
year. "The past few years' multi-year refining margin expansion has been
primarily due to a succession of supply-side issues, including hurricanes, new
product specifications, increased maintenance operations, and multiple
accident-related plant closures," he said.

Verleger noted refiners' tough market will "likely be made worse by the
fact that many of the refinery glitches have been fixed."

--Beth Evans, beth_evans@platts.com