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U.S. Refineries End 2009 On Low Note

Baker & O'Brien Announces Fourth Quarter 2009 PRISMTMResults

February 22, 2010

The U.S. refining industry ended the year on a sour note, with fourth quarter (Q4) margins averaging the lowest for the year. A small up-tick 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 U.S. markets. Average cash margins (EBITDA ) declined by $2.20 per barrel from 3Q 2009. The Rocky Mountains and the West Coast regions (PADDs 4 and 5) suffered the largest declines. Early indications show some margin improvement in 2010, but inputs to U.S. refineries continued their three-year decline.

As noted in the adjacent chart, refinery inputs of crude oil and feedstocks have declined noticeably from 2007 (one of the peak years of refining profitability). Most of the decline in refinery inputs has been exhibited in PADDs 1, 3, and 5. In 2009, total inputs to domestic refineries declined by 750 MB/D (5%) compared to the 2007 average. However, inputs to PADD 1 refineries declined by 16%. As of mid-February 2010, total U.S. inputs are down a further 650 MB/D for a total decline of 1,400 MB/D (9%) vs. 2007, and PADD 1 inputs are 28% lower. These figures reflect the recent closure of two large refineries in PADD 1, as well reduced runs due to poor margins and seasonal maintenance turnaround activity.

As U.S. refiners limp into 2010, it seems increasingly likely that refining margins may have bottomed-out. However, two key questions remain: (1) Will 2010 global demand growth for refined products be sufficient to bring U.S. margins back to “stay-in-business” levels?; and (2) How much additional refining capacity will need to be removed from the Atlantic Basin system before this happens?

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1 Q4 update includes detailed Q3 and preliminary Q4 results.

2 Earnings before interest, income taxes, depreciation, and amortization

3 Petroleum Administration for Defense District