The process of creative destruction sweeping the oil refinery industry has gone from top gear into reverse.
Over the past year, refiners in the Atlantic basin from ConocoPhillips in the U.S. to Petroplus in Europe shut down plants, removing 1.6 million barrels of capacity at the peak in January. The closures triggered a recovery in the refining margin between crude oil and oil products, known as crack spreads, a favourite market for hedge funds.
But the refining business cycle is now turning full circle, with many of the mothballed plants restarting under new owners, again putting pressure on crack spreads.
"The refining outlook has rapidly shifted from the mass closures seen at the start of the year to a mass of restarts over the coming months," says Lawrence Eagles, head of oil research at JPMorgan in New York.
Evan Calio, oil refining analyst at Morgan Stanley in New York, puts it more graphically: "Like villains in horror movies, refineries are hard to kill."
The restart of some refineries comes with the arrival of a new class of owners - from trading houses to airlines and private equity groups - seeking bargains.
Oil traders Vitol and Gunvorbought plants owned by the bankrupt Petroplus in Cressier (Switzerland) and Antwerp (Netherlands) with refining capacity of 68,000 b/d and 100,000 b/d, respectively. Furthermore, two other Petroplus plants - the 162,000 b/d Petit Couronne in France and the 220,000 b/d Coryton in the UK - are still working through temporal agreements in spite of the parent's insolvency.
Meanwhile, Delta Air Lines has purchased the 185,000 b/d Trainer refinery outside Philadelphia from Phillips 66, the refining business spun off from ConocoPhillips, as it seeks to hedge its raising jet fuel costs. Others are looking for further purchases. Carlyle, the private equity group, is in exclusive talks with Sunoco to buy a 330,000 b/d refinery in the Philadelphia area. And PetroChina has offered $350-million for the 235,000 b/d Aruba refinery in the Caribbean owned by Valero.
In total, about 1.3 million b/d of refining capacity that was expected to be closed, is expected to return to the market. Earlier this year, those closures boosted the traditional simple measure of margins, known as the 3:2:1 crack spread, significantly. In the U.S., it jumped to $26 a barrel, compared with a low point of $11 a barrel in early January and a five-year average of $14.7 a barrel. The restart of some refineries in the next few months could send crack spreads down again
The rapid turn around is raising eyebrows in the industry.
The International Energy Agency, the western countries' watchdog, summarised the view of many in the industry saying: "While the refinery purchases surely make sense for the new owners ..., and the restarts are good for employment, they do nothing to address the fundamental overhang in capacity afflicting the OECD".
Of course, some closed refiners are unlikely to restart, supporting crack spreads. For example, the massive 350,000 refinery in St Croix, Virgin Islands - owned by Hovensa, a joint venture between Hess Corp. of the U.S. and Petróleos de Venezuela - will probably be mothballed.
Still, industry executives believe that more refineries will need to close this year to rebalance supply and demand, particularly as oil companies in Asia and the Middle East continue to invest in new capacity.
"We believe there's still too much refining capacity in the U.S. and western Europe," Bill Klesse, Valero chief executive said earlier this month during a conference call with investors. "Some things die hard," he added.