Oil Majors Lost One Engine; Now the Second One Is Sputtering

If Big Oil was a two-engine airplane, you could say it’s been flying on a single engine since energy prices crashed in 2014. Now, the second motor is sputtering.

The major integrated oil companies, including Exxon Mobil Corp., Total SA and BP Plc, have relied on their so-called downstream businesses, which include refining crude into gasoline, oil trading and gas stations, to cushion the losses on their upstream units, which pump crude and natural gas.

“The crash in oil prices in late 2014 brought refineries worldwide a pleasant surprise: booming margins,” said Amrita Sen, chief oil analyst at consulting firm Energy Aspects Ltd. in London. “But now, the market is changing.”

BP, the first major to report second-quarter results, showed the impact on Tuesday. The British company said its downstream earnings fell to $1.51 billion from $1.81 billion in the first quarter and $1.87 billion a year ago. Refining margins were the weakest for the April-to-June period in six years, BP said.
Worse, the company said the refining margins will remain “under significant pressure.” So far in the third quarter, its in-house measure of margins stood at $10.70 a barrel, little more than half the $20 it achieved between July and September 2015. Valero Energy Corp., the largest U.S. refiner, also said on Tuesday it faced “weaker gasoline and distillate margins” during the quarter.

While the downstream business is sputtering, it’s still keeping the plane aloft. Margins remain well above the depressed levels of $5 to $7 a barrel of the late 1990s and early 2000s.

In part, Big Oil sowed the seeds of its problem. Companies pushed their refining units as hard as possible in late 2015 and early 2016, using them to cushion the impact of low energy prices. All went well while demand growth was robust, but as soon as it slowed, refined products, particularly gasoline, swamped the market.

U.S. gasoline futures briefly fell below $1.31 per gallon on Tuesday, the lowest for this time of the year in at least a decade, before closing 0.9 percent higher. Prices were down 0.5 percent at $1.34 at 11:13 a.m. in London. The drop in gasoline is dragging down crude as investors fear that refiners, facing low margins, will cut processing rates. West Texas Intermediate traded at $42.66 a barrel Wednesday, down about 17 percent from its most recent peak of $51.67 in early June.
more at:  http://www.bloomberg.com/news/articles/2016-07-26/oil-majors-lost-one-engine-now-the-second-one-is-sputtering

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