Outlook for N. American, EMEA refining & marketing sector stable

Industry earnings to stabilize over next 12 to 18 months: Moody’s OPEC, non-OPEC

NEW YORK, March 26: The outlook for the North American and EMEA refining and marketing sector has been changed to stable from negative, Moody’s Investors Service announced. Industry earnings will stabilize over the next 12 to 18 months after a difficult 2016, despite still-high inventory levels of both gasoline and distillates.

“We expect the refining and marketing sector to see modest EBITDA growth over the next one to two years, following a very tough 2016, when high inventories and utilization rates narrowed spreads significantly,” said Moody’s analyst Arvinder Saluja. “While those disadvantages will linger, crack spreads should be on a par with or above last year’s levels through early 2018, as demand for gasoline and distillates remains high.”

Demand for gasoline will decrease slightly in 2017-18 after a record 2016, Moody’s says. While OECD gasoline faces a long-term secular decline in demand as vehicle fuel efficiency improves and the use of biofuels rises, lower gas prices have changed near-term driving habits, with sales of less-fuel-efficient vehicles rising. In the US, miles driven will go up 1%-2% this year, even as demand for gas decreases 2%-3%, which is not enough to worsen crack spreads beyond last year’s levels.

Meanwhile, refined-product inventories remain high in the US, which will limit refiners’ margins this year, though production cuts could help reduce inventories overall. Continuing high demand for gas and improving demand for diesel likewise will help bring down inventories, particularly later this year and early next. Meanwhile,

high oil inventories will support crack spreads through 2018, though they won’t be much higher than they were last year.

And in the US, the cost of complying with renewable fuel standards has decreased since the new administration came into office.

The price of renewable identification numbers, or RINs, has fallen to $0.35-$0.50/RIN today from $1.00/ RIN last summer, easing the strain on the margins of merchant refiners such as Valero Energy and CVR Refining.

Fewer advantageous crude options

will continue to hurt refiners on the US East Coast, while US West Coast refiners such as Tesoro will benefit from their market’s tight supply/demand balance. East Coast refiners such as PBF Holding, however, will benefit from reduced competition with European

imports.

Tight crack spreads will discourage brisk production at Europe’s generally less efficient, smaller and less complex refineries, which also face increased competition from capacity expansion in the Middle East.

Ellen Wald, a consultant on the global energy industry, said: “I think the market will react negatively to the lack of a clear direction on a rollover for the deal.”

Before the meeting, Iraqi Oil Minister Jabar Ali al-Luaibi told reporters there were some encouraging elements that suggested the oil market was improving, and that if all OPEC members agreed measures to help price stability, Iraq would support such steps.

“Any decisions taken unanimously by members of OPEC ... Iraq will be part of the decision and will not be deviating from this,” Luaibi said.

Iraq’s oil production is running at 4.312 million bpd this month, Luaibi said, adding that his country had cut its oil exports by 187,000 bpd so far and would reach 210,000 bpd in a few days.

Compliance with the supply-cut deal was 94 percent in February among OPEC and non-OPEC oil producers combined, Russia’s Novak said.

Russia is committed to cuts of 300,000 bpd by the end of April, Novak said.

Novak said he expects global oil stockpiles to decrease in the second quarter of this year. “The dynamics are positive here, I believe,” Novak said, adding that inventories in the United States and other industrialised countries had risen by less than in the past.

Kuwait’s oil minister said the market may return to balance by the third quarter of this year if producers comply fully with their production targets.

“More has to be done. We need to see conformity across the board. We assured ourselves and the world that we would reach our adjustment to 100 percent conformity,” Marzouq said.