North American motorists are paying full value for fuel this summer, as refiners across the continent reap a windfall from lower crude costs that they have not passed through to the pump.
Independent refiners in the United States reported eye-popping second-quarter profits, while integrated Canadian companies such as Suncor Energy Inc. and Cenovus Energy Inc. were able to offset slumping crude prices with fatter earnings from their downstream operations.
They expect a similar trend in the current quarter. But with the summer driving season winding down, the party may soon end for the refiners, as the spread between prices for crude and wholesale gasoline – known as the crack spread – is expected to shrink back to a more typical size after Labour Day.
"You're going to see the gasoline crack come under pressure simply because the gasoline season is ending with more than adequate inventories," Houston-based industry consultant Andrew Lipow said in an interview. "Refiners here in the U.S. and in Europe are well able to supply the North American markets, and we're going into a lower demand period."
Consumers are understandably frustrated. Crude prices have tanked since early May, but gasoline prices have remained stubbornly high. The leading international benchmark, North Sea Brent, fell to $50 (U.S.) per barrel last week from $69 on May 1 – a drop of 28 per cent. But the average Canadian pump price actually rose over that period by three cents to $1.17.6 per litre last week, according to a survey done by Kent Group Ltd.
Crude prices are 50-per-cent lower than last year, while the average pump price last week was down a mere 10 per cent, from $1.31.1 in the first week of August, 2014. Refining and marketing margins in Canada were 10 cents per litre higher as of July 21 than for the corresponding period last year, Natural Resources Canada reports.
Industry officials stress that crude market and petroleum product markets often operate independently, with their own supply and demand dynamics, though clearly the cost of oil is a key determinant for products such as gasoline, diesel and heating oil.
"There is a natural tendency to want to make a direct link between the price of crude and the price of gasoline," said Carol Montreuil, a vice-president of the Canadian Fuels Association, which represents refiners and independent marketers. "It is very dangerous to make that correlation in all cases. … These two commodities both have their own markets, and react to their own variables."
The declining Canadian dollar has offset some of the drop in crude prices, which are set in U.S. currency. And gasoline prices typically rise in the late spring and summer because of higher consumption, then fall in autumn and winter.
More importantly, refiners have been operating above 95 per cent of their capacity – or essentially full out – to meet rising demand in North America, which has seen crude consumption rise by nearly 500,000 barrels per day over the past year. U.S. companies have also boosted exports to grab a greater share of rising demand in foreign markets, including Latin America and Europe.
"All of this compounds the pressure on the finished product market and keeps the market of finished product very firm, irrespective of what's happening to crude," Mr. Montreuil said.
Critics charge the fattening margins show a lack of competition in the refining market. But like the crude side of the business, the refining side is intensely cyclical. Just five years ago, companies were closing plants in eastern North America and the Caribbean because of poor returns.
Longer-term prices on the futures markets suggest the margins will shrink this fall and into the winter, Mr. Lipow said, particularly as major new refineries in Saudi Arabia step up the battle for a share of the diesel market, which is much larger on a global basis than the one for gasoline.
For now, the biggest winners are the independent refiners in the U.S. – companies such as Valero Energy Corp. and Tesoro Petroleum Corp., both based in San Antonio, Tex.
Tesoro – which operates six refineries in western states – posted record levels of operating income, net income and earnings per shared last week in the second quarter, with its quarterly profit more than double the healthy level it posted in the second quarter of 2014.
Valero – which processes nearly three million barrels per day – saw its refining profits soar to $2.2-billion in the second quarter, also double its 2014 figure.
Valero chief executive Joe Gorder said he doesn't anticipate a significant downturn in the business, thanks to rising demand. "I think it will be here for an extended period," Mr. Gorder told analysts on a conference call.
In Canada, companies such as Suncor, Cenovus and Husky Energy Inc. are benefiting from the natural hedge that ownership of refining and marketing assets delivers in periods of low oil prices.
Cenovus reported last week that a 42-per-cent drop in its upstream operating cash flow was partially offset by a 36-per-cent increase in cash flow from its refining and marketing assets – two U.S. refineries it owns jointly with Phillips 66 of Houston.
For its part, Suncor reported reduced operating earnings and cash flow, but still reported net earnings of $729-million for the second quarter. Some 70 per cent of that profit was attributable to its downstream operations, which include four refineries and a network of 1,500 Petro-Canada outlets across the country.