The End of the Low Gas Price Honeymoon: Refinery Margins Narrow as Gasoline Demand Normalizes

---

Researched by Industrial Info Resources (Sugar Land, Texas)--As crude oil maintains a historically low price, the refiners who stood to profit from this cheap feedstock have started to see a shrinking of their margins as 2016 gets underway. After U.S. refineries ran at unprecedentedly high rates last summer to capitalize on the cheap and abundant crude oil, the price at the pump dropped drastically, prompting a spike in car sales to levels last reached a decade and a half ago as consumers aimed to capitalize on the cheaper fuel to get around.

However, consumers can only go on so many long-haul road trips in a year, so after that initial honeymoon period, demand for gasoline has slumped with the onset of winter, exacerbating the drop in demand that came with the return to normalcy. With a mild winter keeping demand for fuel oil low, refiners are seeing their margins squeezed as their utilization rates remain high in this high-supply crude market. Thus, we see the low oil price effects make it all the way down the pipe from upstream production to downstream refining.

Refiners' honeymoon with low oil prices was best exemplified by their increased presence in midstream projects and their demonstrated increased leeway for purchases. Phillips 66 Partners LP (NYSE:PSXP) (Houston) began to invest in the Sacagawea pipeline system in North Dakota by Paradigm Energy Partners LLC (Irving, Texas) as early as late 2014. Valero Energy Corporation (NYSE:VLO) (San Antonio, Texas) exercised its option to purchase a 50% share of the Diamond Pipeline project by Plains All American (NYSE:PAA) (Houston) earlier this year. The Diamond pipeline would feed Valero's Memphis refinery directly from Cushing, potentially bringing in volumes of inexpensive Bakken crudes.

The margin slimming at refiners has a lot to do with overproduction. Like the crude market, the price margin squeeze for refiners has to do with a glut of products in the market. This glut came about due to refiners' utilization of the cheap crude oil that was available to them. Across the board, they upped productions to make more product with the high margins they enjoyed a couple months ago when prices at the pump begin to drop. However, since demand for gasoline has remained steady if not dropped due to the winter season, the supply has overtaken the demand, forcing the price lower. As the spring turnaround season approaches, which will lower supply as refiners shut-in their production, the margin situation for refiners may change.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.