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Over the past month, refiners are down 9%, underperforming a 5% decline in the XLE and a 2% decline in the S&P. A general risk-off bias partially explains the underperformance, but outside of global demand growth, refiners have little direct exposure to the China/US trade dispute. Another possible explanation is increasing geo-political risk, particularly in the Middle East, inflating the price of crude oil. Geo-political inflationary effects on crude prices are problematic for refiners because costs de-couple from demand trends. However, if Mid-East and other OPEC tension is a headwind on refiners currently, we note an offset effect from potentially wider US crude differential benefits in the event of a supply shock.
“Adjustment factor” in EIA supply has been very lumpy, swinging from massive unaccounted for crude volume to a negative adjustment last week. This likely reflects large well pad development, shorter haul imports replacing Arabian Gulf volumes, and lumpy exports with China not participating. For this week, we zero out the adjustment factor, but the range of potential outcomes is wide.
We expect the EIA to report a 2.1MM bbl crude inventory build for the week ended 5/3. That compares to consensus’ 1.2MM bbl build. Our number assumes lower net imports plus stronger refinery utilization w/w. To better calibrate our forecast with what the EIA has been reporting, we are modeling a +550K bpd supply adjustment. Note that each of the last 6 weeks have a had a substantially positive adjustment factor, helping drive the large crude builds we’ve seen recently.
In April gasoline margins continued an expansionary trend, with crack spreads vs Brent at their highest levels since 2017. The trend is evident in all US regions across multiple US crude benchmarks we track (WTI, WCS, Midland, Maya, etc). Diesel margins have been stable at high levels. US refining utilization remains lower than a year ago, while deep global maintenance is evident in lower supplies of refined products on the water, supporting margins.
PSX reported 1Q adjusted EPS of $0.40, beating WR/Cons of $0.31/$0.34, respectively. Chemicals drove the beat, coming in well above our forecast on lower opex and maintenance costs plus higher than expected utilization. The Chems strength was partially offset by greater than expected impact of unplanned downtime in Refining. Refinery utilization was guided to mid-90% utilization for 2Q, however. A seasonal inventory build drove the sizeable working capital increase which drove the $1.3B decline in the cash balance q/q.
We expect the EIA to report a 1.6MM bbl crude inventory draw for the week ended 4/26. That compares to consensus’ 1.3MM build. Our number assumes essentially flat imports and refinery runs, but increased exports w/w. We model flat production and zero supply adjustment factor.
We expect the EIA to report a 1.3MM bbl crude inventory build for the week ended 4/19, above consensus’ 0.5MM bbl build. We attribute the build primarily to an increase in imports w/w. That should be tempered somewhat by higher exports, but we see refinery utilization essentially flat at just 88% (-5% y/y).
Last week, a 0.5MM bbl cargo of Pyrenees heavy/sweet crude was priced at a $9 premium to Brent. This is an important data point because it reflects the value of low sulfur fuel oil and the early impact of IMO 2020 already creeping into the physical market. There is a scarce amount of heavy/sweet crude in the world, but we see current pricing at a premium to light/sweet benchmarks as a temporary dislocation ahead of a broader sweet/sour crude differential tailwind for complex coastal US refineries in 2020.
Near term crude prices could be topping out as liftings increase out of the Arabian Gulf as well as non-OPEC Latin America and Russia. Full data analysis is inside this note, but from a high level we expect data-watchers to get nervous about supply in the coming weeks, as pent up liftings from deeper than expected 1Q production cuts hit the market.
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