Gas Prices Recede and Oil Refinery Companies Benefit

Demand for Gas Gives Refiners a Boost

Oil refinery companies including Marathon Oil (MRO) and Valero Energy (VLO) are benefiting from declining oil prices and summer road trips. The same cannot be said of their oil-producing counterparts, which have been under pressure as crude prices recede.

Between China instituting pandemic restrictions to curb the spread of the Delta variant and OPEC and its partners increasing supply of oil, crude prices have been falling. Prices for US crude are off more than 10% from their high set earlier this year. Refiners make money when the prices for gas are more than what they pay for crude, which is currently the case.

Marathon Makes a Profit

Refiners transform crude into fuel for heating and transportation, and into petrochemicals for products including asphalt. When they are making more money, they tend to increase production, which drives demand for crude. In July, refiners were running at about 90% capacity which is more capacity than last year. Refiners have been benefiting from an increase in road trips during the summer months, which drove the price of gas at the pump to over $3.15 per gallon.

In the second quarter, Marathon posted $751 million in profits from its refining unit. In last year’s second quarter Marathon had a loss of $919 million. Meanwhile, Valero posted a profit in its second quarter after losing money in the second quarter of last year.

Refiner Stocks Underperform

Despite their improving bottom lines, investors have generally not been very enthusiastic about refiners’ stocks. Aside from Marathon, which is up 38% this year, rivals have languished. Phillips 66 (PSX) is flat so far this year while Valero Energy’s 12% gain is underperforming the S&P 500. A big reason why the stocks are not rallying is the increase in renewable-energy costs refiners face. This includes renewable identification numbers, which are credits refiners purchase if they do not meet green mandates.

With summer travel coming to an end, the spread between gas and crude prices should start to narrow. But demand is expected to remain strong as we head into the fall and winter, so refiners should still benefit in the coming months.

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