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US oil refineries are heading for the first gain since the epidemic appeared

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by Arathy S Nair


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July 28 (Reuters) – U.S. oil refineries are set to post their first quarterly gain since the COVID-19 pandemic, although higher oil prices and weak margins in June dampened analysts’ optimism boosted by a rebound in fuel demand.

US diesel and gasoline demand has nearly recovered to 2019 levels following the decline in travel and business activities during the worst of the coronavirus pandemic in 2020. Refineries have ramped up processing on the back of rebounding activity, but are also struggling with higher crude oil prices that are driving up oil prices. It’s up 48% this year.

The three largest self-reliant US refiners – Valero Energy Corp, Phillips 66 and Marathon Petroleum Corp. – are expected to generate combined net gain of about $675 million in the second quarter.

That would be down from $1.3 billion in earnings expectations just 30 days ago, and analysts worry that a resurgence of coronavirus cases will undermine economic demand.

“There are concerns that the second quarter could be the group’s peak earnings this year,” said Jason Gabelman, an analyst at Cowen & Co.

US crude oil is up nearly 24% in the quarter, and while transportation fuel prices tend to rise in tandem, prices for other products such as naphtha, asphalt and propane tend to lag in increasing, putting pressure on margins.

The US Energy Information Administration earlier this month forecast that US liquid fuel consumption in 2021 will rise by 1.5 million barrels per day from 2020. Gasoline supply rebounded in the second quarter to levels not seen since prior the pandemic began.

Analysts are confident about the upcoming reports, following the three largest refiners lost $1.3 billion in the first quarter, according to Refinitiv IBES data. Valero reports its earnings on Thursday, followed by the other two next week.

Going forward, the spread of the transmissible COVID-19 Delta variant threatens the nascent recovery in travel, with the US saying this week that it will not lift any existing travel restrictions “at this point”.

Refinitiv Eikon data showed that refining gain margins began to decline in June, falling to about $19.11 a barrel at the end of the month, compared to $20.42 at the end of the first quarter.

Biofuel mixing hit

Analysts said blending ethanol with gasoline in the second quarter also hurt gain margins, as the price of corn-based fuel was at a scarcely lofty price for gasoline.

Refiners also had to pay more for US renewable fuel credits, which touched a record $2 in the quarter. The cost of Renewable Identification Numbers (RINs) – credits used to comply with US biofuel blending laws – increased 22 cents each to $1.54 at the end of June from $1.32 at the end of the first quarter.

Refiners are required, by law, to mix biofuels into their gasoline basin, or pay so that others can do the alike. The pandemic has reduced synthesizer activity in general, and as a result, fewer loans have been issued, which has increased their costs.

Delta Airlines’ refinery in Trainer, Pennsylvania, in beforetime July posted an operating loss of $157 million in the second quarter, due in part to higher costs associated with integrating biofuels into its products.

Matthew Blair, an analyst at Tudor Pickering Holt and Co., said: (Reporting by Arathi S Nair in Bengaluru; Editing by Margarita Choi)

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