Just last week, the International Energy Agency (IEA) said that global oil (CLU23) demand hit a record in June, and may rise even further. Demand reached an all-time high of 103 million barrels a day, driven by better-than-expected economic growth in developed countries, a strong summer air travel season, and surging oil consumption in China, particularly for petrochemical production.
The IEA said demand could hit another peak in August, and was on track to average 102.2 million barrels per day in 2023 - the highest-ever annual level. That means demand will have risen by 2.2 million barrels a day over the course of the year, with 70% of that growth coming from China.
The robust demand for oil can be seen here in the U.S., as well. Prices for diesel and other distillate fuel oils have surged, as expectations for an improving economic outlook in the U.S. threaten to deplete already low inventories even further.
Refiners' Nirvana
Futures prices for ultra-low sulfur diesel delivered in New York Harbor in September climbed to $135 per barrel on Aug. 9, up from $95 on May 31. Prices for diesel and other distillate fuel oils have been rising much faster than for crude petroleum, which expands profit margins for the companies that refine oil.
The crack spread for making diesel from U.S. crude, with both delivered in September 2023, has doubled to $50 per barrel from $25 at the end of April. And the crack spread for making diesel from U.S. crude, with both delivered in December 2023, has climbed to $43 per barrel from $27 at the end of April.
Distillate inventories have not been rebuilt, despite the supposed economic slowdown. U.S. inventories came in at 115 million barrels on Aug. 4, up from 111 million a year ago, but otherwise were at the lowest for this time of year since 2000.
No wonder, then, that the top U.S. oil refiners intend to run their plants this quarter at up to 95% of their combined 17.9 million barrel-per-day (bpd) capacity, according to industry executives and analysts.
The refining industry has been running at above 90% of capacity for more than a year on strong gasoline and diesel demand - and high profit margins.
Refiners are optimistic about the ongoing bull run due to projected sustained strong demand growth and low inventory levels. Profit on processing a barrel of crude oil at a typical U.S. refinery has jumped by about 33% year to date!
U.S. oil refining companies said, during recent second-quarter earnings presentations, that strong global demand for fuels and low product inventories are driving robust profits. Gasoline inventories are 7% below five-year averages, while distillate inventories are 19% below averages.
Refining Companies to Watch
Marathon Petroleum (MPC), the largest refiner with 13 processing plants that provide 16% of U.S. refining throughput, aims to run at 94% of its combined 2.9 million bpd capacity in the third quarter.
The second-largest U.S. refiner, Valero Energy (VLO), aims to process at up to 95% of its 3 million bpd capacity. Among smaller refiners, Par Pacific (PARR) aims to operate at 92% of capacity, and HF Sinclair (DINO) is targeting 94% of crude oil throughput. Phillips 66 (PSX) laid out plans to run its U.S. refineries this quarter in the "mid-90s%" rates.
Despite persistent Wall Street bearishness around anything energy-related, investors have not missed the profit story surrounding refineries. Some of these stocks are trading at 52-week highs! Year-to-date and over the past 52 weeks, the top-performing refinery stocks are MPC (up 24% and 53% over these time frames) and PARR (up 47% and 83%, respectively).
Since Marathon Petroleum is the largest U.S. refiner, let's take a closer look at this name.
In 2019, Marathon became the biggest U.S. refiner when it agreed to purchase Andeavor for over $20 billion. The combined company has facilities in the mid-continent, Gulf Coast, and West Coast. Marathon is leveraging this geographically diverse footprint to optimize its crude supply from North America to reduce feedstock cost, while also improving its operating cost structure.
In May 2021, Marathon completed the sale of its Speedway segment for $17.2 billion after tax - releasing value for shareholders, as the embedded value of Speedway was well below that level. With the sale, Marathon is no longer a fully integrated refiner, but it is not a pure-play refiner either, as midstream operations – largely held through its MPLX (MPLX) master limited partnership – contribute a greater share of earnings than refining.
Its high-complexity refineries, like Galveston Bay and Garyville on the Gulf Coast (38% of capacity), possess flexibility to run domestic or imported light or heavy crudes, based on which offers the greatest discount. This may be Marathon's greatest competitive advantage.
With oil and its refined products on the rise once again, Marathon Petroleum looks like a good buy here. I recommend the stock anywhere in the $135 to $150 a share range.
