Chevron And Exxon – To Explain Those Weak Refining Profits

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This is something I’ve been banging on about over the years. Refining profits in the US and fracking. The combination of which aid in explaining the weak results from both Exxon and Chevron in the most recent figures.

To set the scene. The US did not allow crude oil exports – largely enough. It did allow exports of refined oil products. Fracking for oil started then grew to substantial size. There was thus lots of crude inside America. Not all of it where anyone really wanted to use it. This depressed the price – higher supply tends to do that.

If exports were allowed of crude then it would be the world price which declines a bit. But they weren’t allowed, so it was local prices which declined more. The WTI/Brent spread widened.

But, as above, refined exports were allowed. So, what was a US refiner looking at? Lower than world prices for crude, world prices for output, profits time!

Then the US allowed crude exports. So, the crude spread declines. That trade barrier induced fat profit margin declines. What happens next?

Which is exactly what Exxon is pointing to and what is also affecting Chevron. Their refining arms aren’t being any worse run than they were, it’s that they’re no longer able to buy US produced crude at a discount to the global price. For Congress allowed the export of crude again back in Dec 2015. It takes a bit of time for trading patterns to change, then the results we’re being show now are for the past year and there we are. The price discount between US produced crude and global has narrowed, meaning that the refineries no longer have that built in profit from US purchase and global sales.

There’s a certain pleasure in being able to say I told you so.