Moody’s predicts sustained negativity for refining industry
Moody's outlook for the refining and marketing industry in both North America and Europe, the Middle East and Africa (EMEA) remains negative, the rating agency says in a new report. The amount of gasoline produced in 2015 through mid-2016 on the back of low crude prices has helped outpace demand for gasoline and distillates in every major economy.
Moody's industry outlooks reflect the agency's expectations for the fundamental business conditions in a given sector over the next 12 to 18 months. A negative outlook indicates that business conditions are expected to worsen during that time frame.
"The earnings of North American and European refiners will decline through next year as a result of slowing demand growth for gasoline, diesel and distillates," said Moody's analyst, Arvinder Saluja. "Fuel inventories will remain above historical averages, further constraining margins."
Fuel production and inventories exceed even the most optimistic projections for demand growth, Saluja says in "Stubbornly High Fuel Inventories Will Keep Margins Low Through 2017." For US refiners, favorable, but narrow, crude price differentials and cost advantages stemming from cheaper natural gas won't fully offset weaker margins. Refiners -- and in particular, those located along the east coast -- will pause operations for maintenance, helping to reduce capacity utilization, though the reduction won't be uniform.
Already-stressed US refiners will also increasingly look for ways to avoid the escalating costs of government-mandated renewable fuel credits, or renewable identification numbers (RINs), which could also squeeze margins next year. RINs are a particular liability for independent refiners and fuel importers without meaningful retail operations, including Valero Energy, CVR Refining LP, PBF Energy and HollyFrontier.
In Europe capacity cuts will proceed, though slowly, Moody's says. Increased availability of cheap crude from Russia, Iran and Iraq will hinder the process, as will local political, labor and environmental incentives. And smaller, less complex refineries will continue to come under strain from expansions at mega-refineries in the Middle East and Asia.
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