U.S. refiners slow output; analysts fret about heating oil

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Headline: U.S. refiners slow output, citing weak demand and profit margins

Source: Wall Street Journal, 24 July 2001

URL: http://www.msnbc.com/news/604335.asp

U.S. refiners, who produced record levels of gasoline during the spring, are slowing production and taking plants down for maintenance because of weakening demand and flagging profit margins.

The moves have some analysts fretting about possible tight supplies of another refined product, heating oil, of which refiners generally begin to build inventories in late summer for the following winter.

“If refiners cut back as hard as they seem to be cutting back, we could be in as serious a situation as last year, when we had really tight supplies” of heating oil, Andrew F. Rosenfeld, a Prudential Securities analyst, said.

As inventories of refined products and crude oil have swelled, a number of refiners, including Tosco Corp. of Old Greenwich, Conn.; Valero Energy Corp. of San Antonio and Sunoco Inc. of Philadelphia, have said during the past two weeks that they are scheduling maintenance — rare during the middle of summer — or simply reducing plant production. The work will take more than 300,000 barrels a day of capacity off the market.

More work planned by other refiners could bring the total to 800,000 barrels a day off line, or about 5% of the roughly 16 million barrels a day of U.S. refining capacity, according to a survey by the Oil Price Information Service in Lakewood, N.J., which monitors refining and retail operations. The situation would tighten further if, as some analysts expect, major oil companies BP PLC of London or Exxon Mobil Corp. of Irving, Texas, take down units or reduce production at major refineries; so far neither company has said it would. Moreover, an apparent decision by the Organization of Petroleum Exporting Countries to reduce output could boost crude prices and put even more pressure on refiners to act to hold up their margins.

The sudden rush to do maintenance is unusual for July and August, typically busy months when refiners are cranking out gasoline to meet summer-driving demand and starting to build winter heating-oil inventories.

Little about this year has been traditional. Unusually low gasoline inventories during the spring led to soaring pump prices. Refining profit margins swelled to triple their historical averages. Refiners cranked up production, generating 2.4% more gasoline during the second quarter than last year, even as gasoline imports rolled in at levels 10% higher than normal.

Then, in an unexpected turn of events, demand flattened during May and June because of the slowing economy. Refining profit margins plummeted. After refiners switched to making more heating oil and diesel, growing inventories and a drop in diesel demand battered those margins. The result was that earlier this month Gulf Coast and East Coast refiners were losing money on gasoline. California refining margins, which soared to 64 cents a gallon during April, have dropped to 11 cents. “We have gone from the best of times to almost the worst of times in only 10 weeks,” Mr. Rosenfeld said.

Refining executives insist they won’t leave the market without enough products. Heating oil and diesel inventories already are 9% above a year ago. “There won’t be a crisis or a major shortage,” Gene Edwards, a senior vice president at Valero, said. “At the pace we’re currently building, if we just go sideways, we will end up about where we were last year.”

That could mean higher prices. Last year, with heating-oil inventories tight, spot prices on the New York Mercantile Exchange spiked to $1.05 a gallon during September on fears of shortages, which didn’t happen.

This year, some safety valves exist. The scheduled maintenance work is mostly short term, so refiners could bring back the plants relatively fast, provided they don’t have problems starting them up again, said Larry Goldstein, president of Petroleum Industry Research Foundation in New York. Imports, too, could pick up again, he said.

Refiners’ timing may not sit well in Washington, where the industry has been under the microscope, Amy Jaffe, senior energy analyst at the James A. Baker III Institute for Public Policy in Houston, said. “The companies in this political environment will have to be really, really thoughtful about how much heating-oil inventory they have on hand,” she said. “They can’t afford to not be producing heating oil pre-season.”

Valero’s Mr. Edwards said refiners “are not going to drive prices back to where they were in April or May.” Rather, he said, “We are just looking for a little margin to stay in business.”

The turnaround to summer from spring also underscores how cyclical the business is at a time when some refinery executives, including Tosco Chief Executive Thomas O’Malley, have been saying higher margins were here to stay.



-- Andre Weltman (aweltman@state.pa.us), July 24, 2001

Answers

Our little respite from high prices is going to be short-lived. One of the best investments anybody can make, is not drugs, financial, tech, utilities but oil and natural gas. The earth has X amount stored beneath the surface and when we use it up, its gone. Our reliance on the internal combustion engine is ubiquitous. The only non-oil consuming vehicle that has been a commerical hit so far is the Honda Insight and Toyota Prius, electric hybrids. Pardon me, the electric golf cart has done real well too but it has limited purposes. It will take DECADES before we switch 50% of our transportation over to hybrids and by that time oil will be scare and very expensive because all the easy to reach oil will have been consumed.

-- Guy Daley (guydaley1@netzero.net), July 24, 2001.

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