An assessment of first-quarter earnings from the largest North America independent refiners and marketers (Andeavor, Marathon, Phillips66, Valero) show a strong start to the year. After adjusting for one-time items, the performance of ongoing operations is generally at or above levels for the same period in 2017.
Delving into more detail by region and configuration, it appears that the strength is coming primarily from exposure to widening domestic crude discounts, with support from continued product demand growth in both the domestic and international markets.
- The strongest performing region is the inland market (PADDS 2 and 4) which are seeing margin increases of around $6/barrel (exhibit). The biggest driver is falling heavy crude prices as growing Canadian product and transport bottlenecks widen the discount to coastal grades. Diesel margins also were stronger than in the first quarter of 2017.
- Coastal markets are seeing flat to slightly lower margins, with some significant variation by configuration. Margins for refining heavy and medium crudes are down due to tightening of heavy crude markets as OPEC has pulled supply off the global market. Growing discounts from running domestic light crude into cracking is boosting margins for simple capacity, helping refineries on the Gulf Coast that are able to source and use growing supplies from the Permian.
US refiner reported throughput by region shows strongest gains in Midwest
This strong start bodes well for another good year overall in 2018, as the first quarter is typically one of the weaker periods of the year. However, there are a number of potential headwinds that the industry will be watching for, especially toward the end of the year. These include:
- Potentially slower demand growth globally due to slower economic growth and/or higher overall prices from tighter global crude markets
- Possible loss of export market volumes for the Gulf Coast if Mexico successfully restores a significant amount of refining capacity
- Growth in spare refining capacity globally with the start-up of significant new greenfield capacity
Tim Fitzgibbon is a senior industry expert based in Houston.
For more on this topic, please visit McKinsey Energy Insights.