US refineries end 2009 with poor Q4 margins

March 1, 2010
The US refining industry ended 2009 on a sour note, with fourth quarter margins averaging the lowest for the year. A small uptick in the light-heavy crude oil price spread wasn’t sufficient to offset further erosion in light product crack spreads. Q4 industry margins averaged more than $2 per barrel less than the Q3 average

The US refining industry ended 2009 on a sour note, with fourth quarter margins averaging the lowest for the year. A small uptick in the light-heavy crude oil price spread wasn’t sufficient to offset further erosion in light product crack spreads. Q4 industry margins averaged more than $2 per barrel less than the Q3 average.

Baker & O’Brien recently released its Q4 industry data service update to the firm’s PRISM model subscribers. The latest data highlight just how challenging the end of the year was for refiners, as margins weakened across all US markets. Average cash margins (EBITDA) declined by $2.20 per barrel from Q3 2009. The Rocky Mountains and the West Coast regions suffered the largest declines. Early indications show some margin improvement in 2010, but inputs to US refineries continued their three-year decline.

Refinery inputs of crude oil and feedstocks have declined noticeably from 2007, one of the peak years of refining profitability. In 2009, total inputs to domestic refineries declined by 750 MB/D (5%) compared with the 2007 average. As of mid-February 2010, total US inputs are down a further 650 MB/D for a total decline of 1,400 MB/D (9%) versus 2007. These figures reflect the recent closure of two large refineries, as well as reduced runs due to poor margins and seasonal maintenance turnaround activity.

As US refiners limp into 2010, it seems increasingly likely that refining margins may have bottomed out. However, two key questions remain:

•Will 2010 global demand growth for refined products be sufficient to bring US margins back to “stay-in-business” levels?

•How much additional refining capacity will need to be removed from the Atlantic Basin system before this happens?

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