The United States' newfound dominance in the global oil and gas industry is a dream come true for Gulf Coast refiners. Thanks to laws passed during the wake of the 1973 OPEC oil embargo, oil companies cannot export crude produced within the United States. However, refined products can be exported.
What this means is that refiners with a presence on the Gulf Coast like Valero Energy (NYSE: VLO), Marathon Petroleum (NYSE: MPC), and Phillips 66 (NYSE: PSX), which has one refinery on the East Coast and three on the Gulf Coast, are able to export refined product to Europe for much wider profit margins than they would be able to achieve within the somewhat oversupplied domestic fuel market.
It's easy to see why these companies are concentrating on exports rather than supply of the domestic market. Diesel is expected to become the world's preferred fuel over gasoline by 2020. However, this growth is expected to come from the rest of the world, while gasoline consumption within the United States is expected to remain static, according to ExxonMobil.
Unfortunately, although demand for diesel is expected to grow within Europe during the next decade, most European refineries are only configured for the production of gasoline and are finding it hard to meet the rising demand for diesel.
What's more, looking at the numbers coming from the Gulf Coast, any refiners that are not taking advantage of the price differential between the two fuels are losing out. Indeed, as of mid-year profit margins on U.S. Gulf Coast diesel were just above $16 per barrel. In comparison, margins on gasoline were just under $8 per barrel.
So, we can see why refiners are ramping up export volume.
It is no surprise that Valero Energy's management actually described the crack spreads within the U.S. domestic market for the fiscal third quarter as 'crummy.' This is why the company plans to expand its export capacity to 400,000 barrels per day over the next few years, up from 193,000 barrels a day of diesel and 91,000 of gasoline exported during the third quarter. Management expects higher export volumes still in the fourth quarter.
Elsewhere, Phillips 66, the world's largest refiner, has recently decided to pull out of Europe, instead focusing on midstream and chemical operations. That said, the company is still driving export volume.
Surprisingly, Phillips 66 only has export capacity for 340,000 barrels per day, similar to that of Valero. The company does plan to ramp this up to 500,000 during the next several years and has increased the volume of fuel exported for four consecutive quarters. However, as I mentioned above, Phillips' management revealed on the third quarter conference call that ramping up export volume was not their top priority, and that spending on refining projects was actually pretty low down on their list. On the call, executive vice president Timothy G. Taylor stated:
We'll fund the advantage crude, we are going to fund the infrastructure around exports and refining, but frankly we just have better opportunities in our higher value businesses around Midstream and Chemicals and we take refining free cash and sell it to those higher value businesses. I think you will see us be very consistent around that.
A competitive advantage
Meanwhile, Marathon's exports reached a record of 245,000 barrels per day during the third quarter, up from only 124,000 during the same period last year. In addition, Marathon's management explained that refiners within the United States have the ability to produce the low-sulfur refined products increasingly being required around the world. In theory, this should further underscore export volumes in the future. This demand, along with cheap WTI and Brent crude coming from domestic markets and Canada should give U.S. refiners a strong competitive edge for a long time to come.
Overall, the ban on crude exports is a boon for U.S. refineries. Gulf Coast refiners are taking advantage of higher profit margins overseas, ramping up export capacity to drive profits. This trend is actually being helped by the fact that European refineries are struggling to produce their own diesel.
Additionally, the ability for U.S. refineries to be able to produce low sulfur refined product is increasing the marketability of Gulf Coast refined product.
All in all, exports, not just to Europe but around the world, are going to be a very important income stream for refiners in the future.
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