Some of the biggest beneficiaries of the shale boom in the U.S. have been refiners such as Valero Energy (VLO 3.07%), Marathon Petroleum (MPC 2.93%), and Phillips 66 (PSX 3.51%). Rising production in the U.S. has widened the spread between WTI and Brent crude, boosting refiners' margins. However, it has also led to calls for the U.S. to lift its decades-old ban on crude oil exports. It is believed that the lifting of ban on crude oil exports will push prices of WTI closer to the global benchmark. Not surprisingly, refiners have opposed any such moves as their margins will be hurt. But a recent report suggests that the White House is nonetheless taking an active look at the crude export ban.
Refiners and their margins
Rising oil production in the U.S. has changed the dynamics of the global energy market. It has also had a major impact on U.S. refiners' financial performance. Refining stocks were among the best performers last year, with shares of Valero, Marathon Petroleum, and Phillips 66 gaining more than 50%.
A surge in U.S. oil production created a glut at the storage hub in Cushing, Oklahoma. This was because most of the refineries on the Gulf Coast have been configured to process heavier, sour crude and not the light, sweet crude produced in the U.S. The supply glut pushed WTI prices lower and created a significant spread between the U.S. and global benchmark. The biggest beneficiaries of this have been refiners. Lower WTI prices mean that refiners get a cheaper feedstock. The finished refined products, though, are linked to more expensive Brent crude. As a result, refiners have enjoyed healthy margins over the last few years.
Their margins, however, were threatened in the first quarter of 2014 as the spread between WTI and Brent crude narrowed. Valero, when it released its first-quarter results recently, said that it saw a decline in gasoline and distillate margins in most regions and lower WTI discounts relative to Brent crude. While Valero still managed to see an improvement in its throughput margin, this was mainly due to the fact that the larger light sweet and sour crude oil discounts in the U.S. Gulf Coast more than offset a decline in gasoline and distillate margins and narrower spread between WTI and Brent.
Phillips 66 also felt the impact of a narrower spread in the first quarter as the company's earnings from its refining business dropped to $306 million from $904 million reported in the first quarter of 2013. Marathon Petroleum's earnings dropped substantially in the first quarter as two of its largest refineries carried out maintenance work; however, the company attributed some of the decline to narrower crude differentials as well.
While a narrower spread had a negative impact on refiners' margins in the first quarter, the good news for them is that the spread has once again widened as crude stockpiles in the U.S. have risen significantly in recent weeks. However, a recent report might cause some concern for refiners.
White House taking a look at crude export ban
According to the Financial Times, the White House is looking closely at the U.S. ban on exports of crude oil. Citing John Podesta, one of President Obama's most senior advisors, the Financial Times reported that the Obama administration was taking an active look at strains caused by the U.S. shale oil boom.
Lifting of ban on crude exports will certainly clear some of the oil glut in the U.S. and push WTI prices higher. While the move is expected to be welcomed by producers, refiners are likely to oppose it. The refiners' opposition to lifting the ban is not surprising as higher WTI prices would hurt their margin. So far, refiners have argued their case by saying that keeping the ban in place will allow U.S. consumers to reap the benefit of the U.S. oil bonanza. Refiners say that allowing crude export would increase WTI prices, which would push domestic gasoline prices higher. However, their argument is flawed.
Indeed, a move to lift the ban could push domestic gasoline prices higher. But as I have discussed in a previous article, if the ban remains in place, keeping WTI prices lower, there will not be any incentive for the U.S. producers to increase their output. Producers will also be discouraged to make new investment to increase their output. In such a scenario, it is likely that the U.S. oil production will drop and refiners will be forced to import more at prices linked to the global benchmark.
Therefore, even by keeping the ban in place, there is a strong possibility that domestic gasoline prices would go higher. At the same time, the U.S. would miss out an opportunity to capitalize on its oil boom. The fact that the White House is looking at the crude oil export ban is a positive sign. For refiners, though, the development could be worrying, given the impact lifting of the ban could have on their margin.
