New York (Platts)--7May2009

US independent refiners appear to be reversing course, boosting gasoline
output in plants they formerly crowed about rejigging to make more diesel on a
long-term basis.

During earnings calls Thursday, several companies said they were
cautiously optimistic on gasoline demand ahead of the summer driving season.
But they all noted a cratering of diesel demand due to the global recession
and said an uncertain time frame for any upturn had prompted them to crank up
gasoline production.

"Let's hope there's a driving season this year," said an analyst on one
call.

Most 2009 capex plans were said to be open to change depending on the
market. For instance, Sunoco trimmed its capex $200 million to $1.05 billion
due to some project deferrals, while Delek raised its budget by $25 million to
$168.5 million due to rising costs for repairs at its fire-hit Tyler, Texas,
refinery.

Independents also said they were taking asphalt demand a bit more
seriously this year due to promises of federal stimulus funding for
transportation infrastructure projects.

"We're seeing quite a few bids" in California for projects that use
asphalt, said Alon USA CEO Jeff Morris during one call. And Holly officials on
their call said stimulus-related demand for asphalt had now been seen in the
company's New Mexico market.

Overall, refiners said they were planning for a tough year and that
refinery run rates would continue to be curbed to boost margins when needed.

HOLLY TO 'OPTIMIZE' REFINERIES

Tesoro CEO Bruce Smith noted California fuel demand has been particularly
hard hit by unemployment, though there appears to be a "plateau" emerging due
to lower retail prices and "disciplined supply adjustments" by West Coast
refiners. "A year ago the industry was maximizing distillate yields," he
noted.

Tesoro has increased second quarter gasoline yields at its two California
plants to 54% from 51% in the first quarter, said Smith, while noting it was
hard to forecast demand at this point despite the historical uptick seen in
the summer months.

He echoed other independents in warning of a "challenging" second quarter
and said "late May/June will determine the entire [quarter's] profitability."

Holly CEO Matthew Clifton said his company would continue to "optimize"
its refineries. He said Holly was seeing mixed margins at its two plants so
far in the second quarter with margins "somewhat weaker" than the first
quarter at its Navajo refinery in New Mexico and "somewhat stronger" at its El
Dorado plant in Utah.

The newly expanded Navajo plant hit 90,000 b/d in the first quarter
before being cut back to run down inventories, said one official. The refinery
will be ramped back up at a later date, he said without giving more details.

Frontier's CEO, Mike Jennings, said gasoline demand "appears to have
found a bottom," and that the refiner has "adjusted our crude and products
slates accordingly."

Data on Frontier's web site shows the company plans to raise its crude
runs at its Kansas and Wyoming plants in May.

The El Dorado, Kansas, refinery will ramp up May crude throughput to an
estimated 135,000 b/d, 7% higher than April throughput of 126,200 b/d,
according to the data. The 52,000 b/d Cheyenne refinery in Wyoming is expected
to run at 43,000 b/d in May, up from 42,800 b/d in April.

'SIGNIFICANT HITS' TO DIESEL DEMAND

The El Dorado plant will run at an average 130,000 b/d in the second
quarter, while Cheyenne should run at an average 42,000 b/d, said an official
on the call. He added that the refiner will "run less heavy crude" due to the
narrow spread between light and heavy grades.

Frontier officials said current diesel demand is 10%-15% lower in the
Rockies and 15%-20% lower in the Midcontinent where wet weather has stalled
spring planting. It was not known if that comparison was based on quarterly or
yearly data and the company did not return a call for comment. However, recent
margins gave more color on the inversion.

The gasoline margin at El Dorado in April averaged $6.99/barrel, rising
to $9.25/b so far in May. In contrast, El Dorado's diesel margin in April
averaged $8.36/b and is now averaging $4.50/b this month.

"We're still seeing significant hits to diesel demand," said one official
noting Gulf Coast refiners may be showing a different diesel outlook due to
exports. Landlocked refiners like Frontier, "live and die by the US economy,"
he said, adding while diesel demand has dropped, "I don't think the suppliers
have changed very much" on output in their region.

--Beth Evans, beth_evans@platts.com