US refining profits poised to drop in 2012
By BEN LEFEBVRE
After a year of record-breaking profits, US refining companies are looking to a less-happy 2012. 
Refiners with operations in the Midwest saw their profits swell, thanks to an anomaly in oil pricing.
But as that advantage fades, the sluggish US economy will play a bigger role in the profits that refiners make from the sale of refined petroleum products, such as gasoline and diesel fuel.
Refining margins, which are the price difference between a barrel of crude oil that refiners buy and a barrel of the finished products they sell, will fall 30% next year, according to one estimate.
For most of 2011, Valero, ConocoPhillips and other refiners operating in the center of the nation booked near-record earnings because they had easy access to crude oil at depressed prices.
A glut of crude oil grew at Cushing, Okla., because the oil-storage hub there had no easy way to transport the fuel to refiners outside the region. Cushing is the delivery point for crude oil in the world's most widely traded crude-oil contract, the New York Mercantile Exchange's West Texas Intermediate crude-oil futures, the US benchmark.
Refiners were able to buy West Texas Intermediate as much as $30 cheaper in the Midwest than Brent crude oil, the European standard used by refiners on the US East coast.
Brent crude oil also is the benchmark used for pricing oil products, which refiners with access to WTI processed cheaply.
The arbitrage allowed refiners such as Marathon Petroleum to boost its refining segment's third-quarter earnings to $1.13 billion, four times what it posted the year before. Marathon's third-quarter earnings were "close to a record," thanks to the WTI arbitrage, company CEO Gary Heminger said during a November conference call with investors.
But the price difference between WTI and Brent has since shrunk below $10.
Supply fears stemming from the Libyan war have receded and Cushing inventories, having already come off their highs, are expected to shrink more with the planned mid-2012 reversal of the Seaway pipeline that will bring excess WTI crude oil to the Gulf Coast.
Refiners will see their profits thin as the price gap shrinks, said Cory Garcia, an analyst at investment bank Raymond James.
"A lot of the gains have come back to earth," Garcia said.
Raymond James estimated that refining margins in 2012 will average $17.50/bbl, down from $25.00 in 2011.
While those estimated margins would still be historically high, the drop in margins will dent refiners' bottom lines: for example, Raymond James revised lower by 27% its 2012 earnings forecast for Marathon Petroleum.
Although demand for US diesel fuel is healthy both domestically and abroad, refiners are increasingly concerned about US gasoline sales.
US gasoline demand is closely intertwined with the US economy and unemployment. The more jobs there are, the more people drive to work.
Gasoline is about half of a typical refiner's total production, but stagnant demand has made the profit margins on it razor thin. US gasoline sales are expected to increase only a few percentage points, if at all, as the broader economy improves in fits and starts.
"It's all going to depend on the larger economy," said Morningstar analyst Allen Good. "If we continue to see high unemployment and high oil prices, we will probably see refining margins continue to fall next year."
Dow Jones Newswires
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