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Can U.S. Refiners Maintain Strong 2nd Quarter Performance?

Baker & O'Brien's Second Quarter 2010 PRISM Reports Continued Margin Improvement

August 9, 2010

Baker & O'Brien, Inc.'s second quarter 2010 (10Q2) release to PRISM subscribers indicates that refinery cash margins have increased, on average, by almost $3 per barrel versus the previous quarter, with the strongest improvement noted in the West Coast (PADD 5). Countering the general improvement trend was the East Coast (PADD 1), where margins declined slightly because of a widening light-heavy crude oil discount and general market conditions. Overall U.S. first half 2010 (10H1) cash margins were much stronger than the last half of 2009.

 

However, during the second quarter of 2010 (10Q2), refining crack spreads began to slip relative to the previous quarter (10Q1), with further weakening noted in July.

 

Baker & O'Brien, Inc.’s recent quarterly release to PRISM subscribers highlights how refinery cash margins (EBITDA1 ) have increased relative to 09Q4. PADD2 3, the Gulf Coast region, enjoyed the largest relative improvement. However, margins in PADD 4, the Rocky Mountain region, have continued to outpace those observed in other areas.

The light-heavy differential increased in the first half of 2010 resulting in the improvement of margins for Gulf Coast coking refineries. However, margins for East Coast cracking refineries remained stuck at depressed 2009 levels, even with the previous shutdown of two area refineries (Valero - Delaware City, DE and Sunoco - Westville, NJ). With the recent announcement by Western Refining of plans to close the Yorktown refinery, PADD 1 refinery capacity will soon be reduced by a cumulative total of almost 400,000 B/D (23%) of total PADD 1 atmospheric distillation capacity operating in November, 2009. While low-cost imports to NY Harbor might be suspected of being the primary cause of margin erosion in PADD 1, a review of recent gasoline and diesel import volumes, as well as an assessment of product price differentials for NY Harbor and the USGC, indicates that low-cost imports are likely not the primary driver. While lower light product demand has reduced utilization in almost every refinery in the world, at this time it appears that throughput in PADD 1 refineries is being shifted primarily to other U.S. refineries (mostly in PADD 3), more so than off-shore refineries.

 

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Recent margin improvements have encouraged U.S. refineries to increase throughputs, with overall refinery utilization rates increasing during the quarter from 82.2% to 88.7%. The increases in throughput varied widely across regions, with PADD 2 (the Midwest) only increasing by 2% vs. an increase of 12% in PADD 3 (Gulf Coast). However on an annualized basis, first-half 2010 throughputs remain just 1% higher than 2009 average.

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During the second quarter of 2010, U.S. refiners exhibited much stronger performance. Whether the industry can sustain this performance for any extended period depends upon strengthening demand for transportation fuels. Supply side challenges in the medium term include currently high gasoline and diesel inventory levels, additional capacity from new projects that are near completion, and announced plans to restart idled refining capacity.

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