Are refiners to blame for your pain at the pump?

Refining inventories have jumped this year. Unsung Oil Refiners PBF Energy (NYSE: PBF) and Delek US Holdings (NYSE:DK) have seen their stock prices more than double in value. Meanwhile, major industry leaders Valero (NYSE: VLO), Marathon Oil (NYSE: MPC)and Phillips 66 are up 30 to 60% over the year. These huge surges come amid a brutal bear market for other stocks.

Fueling this year’s surge refining stocks is their skyrocketing profits. The sector benefits from the widening gap (known as the crack spread) between where it buys oil and the price at which it can sell refined petroleum products like gasoline, jet fuel and diesel. The prices of these products are also increasing this year due to the upsurge in demand. This forces consumers of these products to pay even more, which raises the question of whether refiners are part of the problem. Here is an overview of the current state of the refining sector.

Investigate the problem

Tom Nimbley, CEO of independent refiner PBF Energy, commented on the current refining market environment in the company’s first quarter earnings press release. He said: “Global supply and demand balances were tight at the start of the year. Low product inventories have not recovered due to increased demand and heavy maintenance activities in the entire global refining system.”

In a sense, we’ve hit a perfect storm that’s driving up the prices of refined products. At the start of the pandemic, demand for refined products fell off a cliff. This caused inventory levels at storage terminals to swell, almost causing prices to collapse. As a result, refiners cut production capacity to give the economy time to burn off the excess supply. It happened a little faster than expected. As a result, the sector entered 2022 with less inventory when demand surged, which came at the same time as a supply shock following Russia’s invasion of Ukraine.

Meanwhile, the industry was unable to flip a switch and bring full capacity back online due to annual maintenance activities scheduled for the first quarter to prepare for the summer driving season. However, many companies have worked hard to complete this work as quickly as possible. For example, the CEO of PBF noted that his company: “completed nearly a third of our planned annual turnaround activities, advanced some planned activities due to a window provided by unplanned downtime, and restarted limited secondary processing units on the East Coast. We are focused on getting our entire refining system ready to operate safely and reliably in anticipation of increased seasonal demand.”

Big rival Marathon Petroleum has also worked hard to produce more refined products, even while working on maintenance projects. Marathon processed 2.8 million barrels of oil per day during the quarter, compared to 2.6 million a year ago. This increased its refinery utilization to 91% from 83%. That’s about all the company could produce due to previously planned maintenance activities during the quarter. Now that those projects are complete, Marathon hopes to process even more crude in the second quarter, expecting to boost utilization to 95%.

It’s finally a good time to be a refiner

Refiners are price takers, not price makers. They take what the market gives them for the refined products they sell; they don’t set those prices. It’s great when the crack spread is wide, but it’s difficult when it’s narrower.

Most refiners are benefiting from the increase in crack spread these days after suffering a much smaller drop last year. For example, Marathon Petroleum generated $1.4 billion in adjusted earnings before tax, interest, depreciation and amortization (EBITDA) from its refining and marketing segment during the first quarter. That’s a remarkable improvement from just $23 million in adjusted EBITDA the company recorded outside the sector in the first quarter of last year. The widening of the gap was an important factor. Marathon’s refining margin climbed to $15.31 a barrel in the quarter from $10.16 a barrel a year ago.

Its smaller rival, Delek US, reported crack spreads in regions where it operates soared 84.2% in the first quarter. This helped the company generate $152.9 million in adjusted earnings from the segment, a significant improvement from a loss of $3.9 million in the prior year period.

Valero also posted a much stronger refining profit in the quarter. After reporting a loss of more than $500 million last year, Valero generated a profit of nearly $1.5 billion in the first quarter.

Take what the market gives them

There is no doubt that most refiners are benefiting from the improved demand for refined products these days. However, they are not responsible for the problem either. Demand picked up faster than expected and came at a time when inventories were low and the industry was busy working on maintenance projects. Although most of these projects have been completed, it will take time for the industry to catch up with demand and rebuild inventory levels. In the meantime, they will make a nice profit, which will help offset the losses many have suffered over the past couple of years. This could give their stocks the fuel to keep rising, which would help their investors offset at least some of the increase they are paying at the pump.

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Matthew DiLallo has positions in Phillips 66. The Motley Fool does not have positions in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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