Refiners Face Perfect Storm of Slowing Demand and Tariff Threats
As the fourth quarter earnings season approaches, Wall Street is bracing for a significant decline in profits for U.S. oil refiners. The sector is facing a double whammy of softening fuel demand and the looming threat of tariffs on crude imports from Canada and Mexico.
Fuel Demand Slows Down
After reaching record levels in 2022, U.S. refiners have seen their earnings slide. The recovery in demand following the COVID-19 pandemic and Russia’s invasion of Ukraine drove up fuel prices, but that demand has since slowed. According to the U.S. Energy Information Administration (EIA), U.S. gasoline retail prices decreased for the second consecutive year in 2024.
Refining Margins Take a Hit
The U.S. gasoline futures crack spread, a theoretical measure of a refinery’s profit margin, fell below $11 a barrel to a one-year low in December. The ultra-low sulfur diesel futures crack spread eased to a nearly two-month low of under $22 a barrel during the month. “Refining margins have really come off the boil a lot and crack spreads are quite low,” said Stewart Glickman, equity research analyst at CFRA Research.
Earnings Expectations
Valero, the second-largest U.S. refiner by capacity, is set to kick off refiner earnings on Thursday, with analysts forecasting profits of 7 cents per share, down from $3.55 per share a year ago. Marathon Petroleum, the top U.S. refiner by volume, is forecast to report per share profit of 12 cents, compared with $3.98 per share a year ago. Phillips 66 is expected to report earnings of negative 23 cents per share, compared with $3.09 per share a year ago.
Tariff Threats Loom
Investors are also keen to hear from U.S. refiners on how they are preparing for the potential impact of the tariffs on imports from Canada and Mexico. The new tariff could drive up the cost of crude for refiners, particularly in the Midwest that processes about 70% of the 4 million barrels per day (bpd) of crude imported from Canada. “Obviously, refiners have to plan for the scenario,” said Brian Kessens, portfolio manager at Tortoise Capital.
Refiners Prepare for the Worst
Many U.S. refining facilities are configured to run heavier oil grades – like those from Mexico and Canada. Some were buying an outsized amount of Canadian crude at year-end to help cushion against potential tariff impacts. U.S. crude oil imports from Canada rose by 689,000 barrels a day in the week ended Jan. 3 to 4.42 million bpd, the highest on record going back to June 2010, EIA data showed.
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