When US refiners release fourth quarter earnings in a couple weeks it's going to be ugly. That point was driven home today when Hovensa, the joint Hess-PDVSA refinery in St. Croix, said it was joining a list of other East Coast refineries in shutting its doors.
For the refinery business as a shole, a string of losses are expected as big discounts for WTI-priced crudes were erased during an already weak period.
The WTI/Brent spread tightened to about $10/b from more than $25/b in the fourth quarter after it was announced that the Seaway pipeline would be reversed to take a glut of Midcontinent crude to the Gulf Coast.
According to Platts data, Gulf Coast refiners were especially hard hit. The LLS cracking margin averaged about $5.62/b in the fourth quarter, down from more than $11 in Q3, while the Mars coking margin dropped to $1.94/b from more than $6/b in the prior quarter.
"Buyers of long-haul crude lock in their purchase decisions vs alternatives months in advance of arrival," Credit Suisse analysts said in a report. "This worked fine when WTI and LLS moved in a narrow band. However the sharp rise in WTI prices caused all sorts of havoc in differentials between grades of crude and intermediate products, which are not captured in benchmark margins."
The one-month to two-month pricing lag for refiner crude purchases meant companies were "committed to crudes priced as if Brent-WTI and Brent-LLS was $20+ per barrel, even as that spread fell below $10/bbl," said Deutsche Bank.
Tesoro has already pre-announced a net loss of $0.55 to $0.80/share, citing weak California demand coupled with the WTI/Brent collapse. Big refiner Valero is expected to also post a net loss of somewhere between $0.05-$0.15/share.
"This is above all due to the sudden narrowing of the Brent-WTI and Brent-LLS spread in the quarter, which had provided a boom in margins above and beyond the underlying secular positives in US refining," said Deutsche Bank. However, the analysts said their "Diamond Age" refining scenario continues thanks to strong US product exports and oil supply growth.
That includes any increased distillate demand from Europe due to Petroplus' decision to shut plants as it deals with a severe credit crunch.
Global Hunter Securities analysts also think things will get
better. "As of now, we expect 2012 to see more favorable
economics for Valero relative to 4Q11," they said in a report,
citing light-heavy crude differentials they believe will
"self-correct." Still, they dropped Valero's Q4 2011 earnings
estimate to an $0.08/share loss from a $0.97/share gain.
Meanwhile, Midcontinent refiners should show a better Q4 result
than their coastal counterparts, according to analysts.
Earnings for HollyFrontier and Western Refining should "hold up
significantly better than coastal peers," said Macquarie analyst
Chi Chow. "Crack spreads weakened seasonally but still held at
reasonable levels, particularly in the Southwest market."
To subscribe or visit go to: http://www.platts.com