Oil profits soar as consumers keep pumping fuel

Globe and Mail | May 21, 2007

North American refiners will easily outpace their stellar first-quarter results during the rest of the year, analysts suggest

To the dismay of motorists fuming about high pump prices, North American oil companies are enjoying record returns in their petroleum refining and marketing operations, despite some losing revenues from refinery shutdowns.

Three of the leading four gasoline marketers in Ontario saw their combined profits from the so-called downstream side of the business jump by 69 per cent in the first quarter of 2007, compared with the same period in 2006, Spencer Knipping, a petroleum market analyst with the provincial government, said in a report last week.

And since then, margins and pump prices have climbed sharply across the continent. Analysts suggest the North American refiners will easily outpace the stellar first-quarter results throughout the rest of the year.

With this weekend’s start of the summer driving season, North American motorists were seeing record prices in many markets, particularly in the Midwest and the West Coast, including $1.30 a litre in Vancouver.

Though many analysts expect a slight easing over the next month or so, they warn that disruption in crude oil markets or among refiners would quickly send pump prices to new highs, with the exception in Canada of a one-week spike after hurricane Katrina in 2005.

And that spells fat profits for the companies that refine and market gasoline and diesel fuel.

Mr. Knipping calculated that three companies – Petro-Canada, Imperial Oil Ltd. and Suncor Energy Inc. – earned $481-million from petroleum products in the first quarter, up from $285-million in the first three months of 2006. He could not include Royal Dutch Shell PLC because it no longer breaks out its Canadian operations.

And that combined increase came despite flat downstream revenues at Imperial Oil, where a fire at its Nanticoke refinery shut down production for a month – an outage that contributed to a widening gap between Canadian and U.S. wholesale prices.

Since then, “refining margins have remained quite high, in fact they have gone up,” Mr. Knipping said. Last week, the spread between crude oil and wholesale gasoline prices in New York City – the benchmark for the North American market – stood at $32.57 (U.S.), up from an average of $12.93 in the first quarter.

“So profits are likely to go up … We’re getting into the higher demand driving season so we’re going to see higher prices and possibly margins will continue to rise.”

Cathy Hay, an analyst with MJ Ervin & Associates, noted that consumers have shown no signs of cutting back on their driving going into the summer season. Despite record and near-record prices, demand in the United States is still about 1.5 per cent higher than it was this time last year. Recent Canadian demand figures are not available.

“I don’t see people changing their behaviour,” she said, adding she still intends to spend her summer weekends “driving to the lake at $100 a crack” in fuel costs.

However, Alison Hermansen, vice-president for travel services for the Canadian Automobile Association, said Canadians are beginning to adjust to the high pump prices when planning their summer holidays.

“It’s looking like a really strong summer travel season, but with people staying closer to home,” she said.

But while demand growth has softened, few expect prices to ease more than slightly in the coming weeks. Inventories remain well below average after strong demand in the first quarter, plus falling imports and a spate of refinery accidents forced companies to draw down stocks at a time when they would be typically building them to prepare for the busy summer months.

Some experts warn prices could set new records this summer, especially if another active hurricane season threatens Gulf Coast refineries that are still recovering from Katrina and Rita two years ago.

“With the hurricane season approaching, continued tight refinery conditions – both in the United States and elsewhere – low gasoline inventories and increased demand for summer travel, upward pressure on gasoline prices will remain in place,” Guy Caruso, head of the U.S. Energy Information Administration, told a congressional committee.

The refining winners

Fadel Gheit, an analyst with Oppenheimer & Co. in New York, says companies that operate exclusively in the refining and marketing side of the business are primed to double or triple their earnings in the coming quarters.

Those companies include Valero Energy Corp., which has a major refinery in Quebec City, Marathon Oil Corp. of Houston, and Tesoro Petroleum Corp. of San Antonio.

“It’s going to be an enormous year,” Mr. Gheit said. “It’s a perfect storm where everything that could push margins up has taken place.”

Since February, the industry has seen rising demand, though the growth has finally slowed. There have been strikes in Europe affecting imports, and unplanned refinery shutdowns reducing supplies in already tight markets.

Texas-based Valero – North America’s largest refiner – reported its highest quarterly profit in company history for the first quarter, with earnings of $1.1-billion, up 30 per cent from the corresponding period in 2006.