When quickly perusing several U.S. oil refiners, most seem to be trading near 52 week lows. The few that I looked at were Valero (VLO), Tesoro (TSO), Western Refining (WNR), Delek (DK), and Alon (ALJ). I know that crack spreads have narrowed considerably causing a sharp decline in profit. I’m interested in finding out why refiners can’t seem to keep up with increased crude prices.
Why can’t they simply raise their gasoline sales prices in order to account for their rising crude costs? Assuming a constant crude price level (an unrealistic assumption) are we looking at a major correction in gasoline prices in the near future? Is it that crude prices rose so much so quickly that gasoline prices simply couldn’t keep up?
At the very least, it does seem to point out that these refiners need to have better hedging strategies.
I read a discussion about this. The problem appears to be that the US consumer market is becoming elastic at these prices, as high prices have cut consumption enough to make it difficult for retailers to raise prices to the extent oil prices have gone up. The demand from India and China means that the oil suppliers are not under this pressure. (Which makes me wonder: how the hell are the Chinese affording $140 a barrel oil?) Plus, much of the run-up is speculative, and some of it is due to the weak dollar. I trust no one is still saying that a doubling of the price of oil is only due to fundamentals.
To the OP: I don’t think refineries are performing poorly. I think economists at the oil companies, and the consultants that they employ, are trying to determine how much of today’s per oil barrel is due to speculation and the devalued dollar. They also need to determine if such a price is sustainable and for how long because they can’t just build a refinery over night. Also, gas isn’t the only thing these oil companies sell so adjusting the business plan is going to take a lot of coordination. One thing large companies aren’t is nimble or flexible.
The Chinese can’t afford $130, at least according to this article, without government subsidization. The articles is largely about pollutant effects (where the hell is their Kyoto treaty?] of their “subsidized” oil, replete with 10 hour long gas lines and rationed gas purchases. It’s only a matter of time before their economy comes spectacularly crashing to a halt. This is a perfect example why government should intervene in markets as little as possible. (which reminds me, I should probably sell my China ETFs).
I’m not sure I’m following what you are saying here. It seems pretty clear that the refiners are performing poorly. Take Tesoro as an example, which I used because they are a well known, good sized U.S. refiner, and I believe they are representative of the industry.
I quickly took at look at their gross profit, gross margin, net profit, net margin, earnings per share, and stock price and they have performed worse at each successive quarter. In fact, at the quarter ended 3/31/08, they actually reported a negative gross profit in addition to negative earnings per share of $0.60. At the same time, their outstanding debt has increased substantially. They are looking at two consecutive quarters of negative earnings per share, their working capital situation has worsened, debt is up, and they are trading near a 52-week low. By most measures, they are doing terrible right now.
The root cause of the decline in the tightening crack spreads. Obviously there is some reason that they have been unable to raise gasoline prices in lockstep with crude oil prices. As Voyager pointed out, the issue could be that consumers have reduced their demand as prices have increased.
It seems to me that this situation is unsustainable and that we could be looking at a tremendous spike in gasoline prices.
Hmmm…I was thinking you were talking about something else. I agree with Voyager. I was thinking ahead that more drilling and more supply with more production facilities should translate into lower production costs but higher profits. Ok, not exactly what you were looking for. Sorry, I was more interested in the other question I addressed, but was off-topic.
BTW here is a story from Marketplace yesterday on who is getting rich from high oil prices - basically the producers. While I’m sure that speculators are not getting a lot of money out of a barrel, I don’t think this says that they are not driving up prices by their self-fulfilling prophecy that prices will go higher.
Would their economy grind to a halt , or would it sputter in different locations but get attention from peking. As well, what does that earthquake do for their domestic diesel and gasoline distribution. I noticed in the paper today that some govt official told all departments to cut spending so as to free up money for disaster relief, so Im guessing that the truckers in some parts of china are going to see an immediate correction.
Is it just the independent refiners who are showing poor performance?
Most of the majors break out upstream/downstrem/chemical business on their annual and quarterly reports. Prehaps by comparing the turnover net income, ROCE of the majors refining business with those of the independent refiners you would get some insight as to if this poor perfomance by the independent refiners is due to issues affecting all refiners (crack spreads etc) or internal issues specific to the independent refiners such as larger cost of capital than a major.
I would look it up myself, but I am currently 1,000Km past the arse end of no where and the conection can barely deal with the message board let alone downloading some annual reports.
cheers
NBC
Given how they are still experimenting with free markets, but still actively controlling their economy, I’m guessing that the Chinese government would also take a more active role to both “correct” the market (in their opinion), and try to ease the plight of the people. Things will look ok, in the extreme short run, but then at some time (this is variable because I’m not sure how “free” flowing information is over there), market distortions will cause even more chaos. I’m guessing revolt. I’m also skipping a whole lot of Yuan fluctuations and investor panicking, but it’ll be there to some extent as I’m not sure how much control the government has with their stock exchange.
Damages could be lessened, imo, if they allow foreign aid, end subsidies (except for survivor relief) and free up credit, free up the Yuan, and adopt a more expansionist currency policy. However, this will undoubtedly lead to massive inflation (the inflation that they have been so far trying avoid by tying the Yuan to the $) and massive correction in trade imbalances.
Just quickly looking at Exxon’s 3/31/08 10Q showed a reduction in U.S. downstream earnings of 53% and a reduction in non-U.S. downstream earnings of 28% as compared to the quarter ended 3/31/07. They attribute this to “significantly lower worldwide refining margins” which “decreased earnings approximately $1.0 billion”. I have not looked at any of the other Majors, but I would assume that the results would be similar. The declining crack spreads seem to be the culprit.