2017 US Refining Forecast
A challenging commodity worth surroundings and increasing fuels rules will mix to keep U.S. refiners below strain in 2017.
By Matt Flanagan
The 2016 U.S. refining market proved to be a really challenging surroundings, as evidenced by refining margins roughly half of their 2015 levels. A number of unbiased refiners experienced losses in 2016. Demand for refined products, particularly gasoline and diesel, remained typically flat over 2015 ranges, nor did the U.S. see an overly strong summer driving season.
The availability facet of the downstream market was the root of refiners’ challenges in 2016 because the availability of advantaged Bakken, Canadian and shale crude gave refiners the misplaced incentive to produce. Utilization rates remained well over 90%, effectively at full capability. Nonetheless, without elevated demand the markets saw a dramatic improve in gasoline stocks by the first half of the yr.
Refiners acquired a bit of a market reprieve with the Colonial Pipeline outage in September, impacting about 1.3 MMbbl/d of product provide into PADD (Petroleum Administration for Protection District) I (U.S. East Coast). So while general gasoline stocks are still above anticipated ranges, inventories in PADDs I and III (U.S. Gulf Coast) did drop within the third quarter because the market sought any approach potential to carry supply into the East Coast markets.
Vertically built-in downstream companies—those with advertising and marketing channels, in addition to midstream operations— fared higher in 2016 than the pure-play service provider refiner promoting at the rack. Marketers saw robust margin uplift by way of their branded channels and midstream operations offered ratable income.
Renewable Identification Numbers (RINs) proceed to be a lightning rod for the industry as estimated costs for the refining trade are $1.Eight billion, making Renewable Fuels Commonplace (RFS) compliance the biggest operating expense for refiners. And, given the margin strain in 2016, refiners not fully RFS-compliant will be harassed to fulfill compliance deadlines.
2017: The place is the U.S. refining cycle
Absent the refined product inventory drawdown skilled in the fall of 2016, U.S. refiners would clearly be taking a look at a very tight market highlighted by pressured margins. The product export market might absorb some of the excess inventories, however with lowered demand in Asia, uncertainty with Europe and potential departures from the EU submit-Brexit, it isn’t expected that product demand will rise.
No matter inventory ranges going into 2017 there are several themes rising around the 2017 U.S. refining market.
Intensified focus on price discount
Refiners relentlessly handle capex and opex spending, and 2017 will be no completely different. Companies will search to do “less with more” and many will develop the use of outsourcing of non-core features, including in some instances portions of their business activities (i.e. middle office, threat, and so forth.). While not early adopters of technology, refiners have been adept at leveraging data techniques to streamline their enterprise capabilities and optimize headcount where attainable.
Ought to an extended low refining margin cycle persist some refiners would be finest served at using zero-based budgeting to proper measurement their organizations to be leaner. Low-hanging fruit in organizations’ basic and administrative budgets tends to undergo annual 5% to 10% or more reductions, but many downstream organizations would do properly to begin from a zero-foundation and construct to a minimal wanted to run the enterprise.
RFS, RINs’ affect on margins
Without adjustments to the existing RINs markets, particularly wise mandates and increased transparency of the RINs market itself, U.S. refiners will continue to be short-squeezed. Greater mixing mandates proposed by the federal authorities for 2017 will lead to greater RIN prices next 12 months. The federal government proposes to extend the 2017 mandate compared to 2016. The higher mandate makes it harder for blenders to comply, requiring them to use RINs from prior years, placing upward pressure on costs.
Value chain integration
With the arrival and rapid development of a number of independent refiners (i.e. Tesoro, HollyFrontier, PBF Vitality and Delek) over the past 5 to 10 years, most now discover themselves with a far more geographically numerous asset base to manage and optimize. Many oil to petrol ratio for chainsaw have leveraged MLP constructions to drop down midstream operations, including truck racks, rail services and even individual refinery processing units. Nearly all have invested important money and efforts to determine an IT platform to assist business and accounting activities.
With extra numerous belongings and markets to serve these downstream organizations have much more industrial optionality. Optimizing crude sourcing, storage “plays” and even logistics alternate options all create alternatives to drive higher shareholder value. Enabling these alternatives would require downstream organizations to foster cross-practical collaboration and resolution-making, supported by a shared view of current and forward markets, prices and manufacturing capabilities.
Worth chain integration may imply downstream or upstream. On the downstream facet, firms such as Tesoro will possible proceed to take a position in their advertising channels, which to date has resulted in stronger margin uplift.
Shifting upstream might afford downstream organizations the choice to become non-operating curiosity holders in selected oil producing assets, which comprise a portion of its ratable crude slate. With E&P asset valuations still at historic lows, and many E&P companies themselves on the brink of bankruptcy, this continued burdened oil market might present a buying opportunity for a subset of the refining market.
Expanded buying and selling capabilities
The U.S. downstream market is characterized by a variety of supply and buying and selling capabilities; in a single sense are organizations which are basically supply features with trading personnel “procuring” crude for his or her refineries, and in one other are more robust asset-backed trading homes with an means to take positions in a number of commodities while nonetheless serving its refining wants.
In an try to develop earnings in a depressed downstream cycle some organizations will look to expand their supply capabilities into conducting more asset-backed buying and selling. This clearly creates capital requirements on those organizations along with an elevated want for commodity and monetary risk management, controls and governance.
Continued M&A in downstream
Count on the U.S. refining market to see continued divestment of non-core downstream assets by the majors in 2017 with a number of websites having been on the marketplace for years now. Bid-ask spreads stay vast for selected belongings and new entrants to the refining space current sellers with new options. Of particular observe can be a continued press by international gamers to enter the U.S. downstream market via refining opportunities or through extra traditional advertising and marketing channels.
Refiners are accustomed to oil to petrol ratio for chainsaw the margin cycles and the way production rates and inventories impact markets. The “golden era” of unbiased refiners may be waning, but alternatives to build and function commercially profitable downstream companies is alive and effectively. The secret is to operate effectively, exploit vertical integration choices and leverage scale when possible.
Matt Flanagan is a accomplice with Opportune LLP in Houston. Flanagan’s primary focus areas embrace mergers and acquisitions, vitality buying and selling and risk administration, supply chain optimization and enterprise transformation initiatives.