In the realm of U.S. refinery operations, the first quarter of the year is anticipated to witness a decline in profits compared to the recent high records, notably post the upheaval caused by Russia's invasion of Ukraine in 2022. However, despite this anticipated dip, the sector is poised to maintain a robust performance, largely supported by ongoing disruptions in Russia and extensive refinery maintenance activities.
Looking ahead, analysts predict that while earnings in the upcoming quarter may only represent a fraction of the record levels, they are likely to rebound in the subsequent months as demand in the market picks up momentum.
One significant factor contributing to the buoyancy of margins in the initial quarter was the occurrence of outages at Russian refineries, triggered in part by Ukrainian drone attacks, which had led to the closure of approximately 14% of Russia's refining capacity by the quarter's end.
Jason Gabelman, an analyst at TD Cowen, expressed confidence in the sector's resilience, foreseeing another robust quarter ahead. He emphasized the continued significance of war-related supply disruptions when evaluating the trajectory of refining margins, indicating the sustained impact of geopolitical tensions on industry dynamics.
In the United States, refiners grappled with a combination of planned and unplanned maintenance activities during the quarter. Notably, a significant outage occurred in February at BP's refinery in Whiting, Indiana, which has a daily capacity of 435,000 barrels. Overall refinery utilization rates in the U.S. declined to 80% in February, in contrast to the roughly 87% observed during the same period in the previous year, as reported by the U.S. Energy Information Administration (EIA).
Furthermore, a positive demand outlook coupled with robust product cracks is expected to drive refinery gains in the first quarter, as highlighted by Matthew Blair, managing director at TPH&Co. The increase in gasoline prices witnessed in March propelled gasoline crack spreads to their highest levels since August 2023, underscoring the favorable market conditions for refiners.
Valero Energy, the second-largest U.S. refiner by capacity, is slated to kick off the earnings season on Thursday, with analysts projecting profits of $3.24 per share, representing a decrease from $8.27 per share reported a year ago, according to data from LSEG. Marathon Petroleum, the top U.S. refiner by volume, is expected to report earnings per share of $2.39, down from $6.09 a year ago, while Phillips 66 is anticipated to report earnings per share of $2.17, compared to $4.21 a year earlier, according to estimates from LSEG.
Gasoline prices could escalate by up to 15 cents per gallon due to these disruptions, with the possibility of unplanned plant outages or other unforeseen supply shocks pushing prices over $4 a gallon for the first time since 2022, as highlighted by Patrick De Haan, a petroleum analyst at GasBuddy.com. TD Cowen's Gabelman anticipates some modest improvement quarter over quarter as refiners transition into the more robust part of the year.