What happened
Shares of leading refining companies Marathon Petroleum (MPC 0.95%), Phillips 66 (PSX 1.51%), and Valero (VLO 1.23%) rallied more than 10% by 10:15 a.m. EST on Monday. Fueling this rally was news that a vaccine candidate by pharmaceutical giant Pfizer was more than 90% effective in preventing COVID-19 in volunteers in the global trial.
So what
The COVID-19 outbreak caused demand for oil and refined products to plummet this year. That's weighed on refining margins, forcing refiners to cut back on their production. As a result, refining companies have been posting big losses.
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Phillips 66's refining business reported an adjusted loss of $970 million in the third quarter, an even deeper loss from the $867 million it posted in the second quarter, as its refining margin shrunk another 32% to $1.78 per barrel. Meanwhile, Valero's refining business lost $629 million in the third quarter, while Marathon's lost a whopping $1.6 billion, a huge reversal from the year-ago profit of $989 million.
One of the reasons these refiners are losing so much money is that they aren't utilizing all their capacity because of the pandemic's impact on demand for refined products. For example, Valero only refined 2.5 million barrels per day (BPD) during the quarter, compared to 2.93 million BPD in the year-ago period. Meanwhile, Marathon's crude capacity utilization was only 84% during the period, which, while an improvement from 71% in the second quarter, was down from 98% in the year-ago period.
Phillips 66's utilization also remained low at 77% during the quarter. That's only a slight improvement from 75% in the second quarter due, in part, to a hurricane-related power outage at one of its refineries.
However, the approval of a highly effective vaccine against the virus could enable the global economy to reopen fully. That would fuel higher demand for refined products because employees could return to the office and travel for business, while non-essential travel could continue rebounding.
A bounce back in refined product demand would boost refining margins while enabling refiners to increase their volumes and utilize more of their capacity. That would likely fuel a big rebound in refining earnings.
Now what
Refining stocks are rising on the hope that we're nearing the beginning of the end for this pandemic. That's because a highly effective vaccine would allow for increased travel, fueling more demand for refined products.
However, positive data doesn't guarantee approval. Further, it will take a considerable amount of time to vaccinate everyone when there is an approved vaccine, given the limited available manufacturing capacity.
Because of that, it will likely take quite a while before refined-product demand recovers to its pre-pandemic level, which might never happen given the rise of remote work, which could permanently impact commuting and business travel. That uncertainty suggests that oil refining stocks could remain quite volatile in the coming months until there's more clarity on future demand.
