Summary
Goldman Sachs raised their refining view to neutral from cautious on a better demand outlook. Goldman analysts said in a note to clients: "We increasingly believe we are moving through the trough of the refining cycle."
This position is very difficult to understand in view of the current glut of crude and of gasoline and refined products announced by the EIA.
Analysis
Today's EIA crude oil inventory report has the following news that are not easy to reconcile with the Goldman recommendation.
1. Crude oil inventories rose by 2.8 mil barrels for the week ending September 18, up 10.6% Y/Y.
1. Crude oil inventories rose by 2.8 mil barrels for the week ending September 18, up 10.6% Y/Y.
2. Gasoline inventories rose by 5.4 mil barrels, up 7.1% Y/Y.
3. Distillate inventories rose strongly by 3,0 mil barrels, up of a significant 31.4% Y/Y.
4. Refinery capacity utilization was practically unchanged at 86.7%, improved of 9% Y/Y.
5. Prices per gallon have plummeted Y/Y as follow: regular gasoline 31.2%, reformulated
gasoline (RBOB) 31.6%, N.2 heating oil 37.5%, N.2 low-sulfur diesel 38.5%, kerosene
type jet 42.9%.
Refineries, already running at very low levels of capacity utilization, have to further reduce capacity in order to limit the already swelling and costly products inventories. As an example, Valero, the larger US refiner, which has 16 refineries and about 3 million barrels per day in processing capacity, announced on September 8th that they will sack hundreds of workers and idle several major processing units. They intend to shut the coker unit and gasifier complex at its Delaware City 210,000 bpd refinery and also to idle indefinitely the FCC unit and a coker at its Corpus Christi, TX refinery. They have already shutdown completely the 275,000-bpd Aruba refinery, which had been running on a very reduced scale, and have recently announced as well that the expansion of crude and coker units at its 250,000 bpd St. Charles, LA refinery have been delayed to 2012.
And other refiners are doing the same, e.g. Shell announced few days ago that they will idle several units at their Deer Park, TX refinery.
This is not a USA problem only, but a European problem as well, and is extended to the petrochemical industry. The European petrochemical industry is experiencing great difficulties and is currently operating in the most hostile environment seen in decades because demand has collapsed and cost competitiveness is very difficult against the Middle East suppliers.
Is Goldman formulating this "upgrade" of the refining sector on the basis of their own interests, or on the basis of the interest of some of their big institutional clients? It is questionable!
Michele Acerra consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
