Diesel Profits Fuel Refiner Comeback

Hello! Today, I've brought this topic to you! Have you been watching the energy markets? After a bit of a slump, it looks like U.S. oil refiners are gearing up for a major comeback. Investors are buzzing with anticipation for second-quarter results, and the reason for this optimism might surprise you. It’s all thanks to the unexpected strength in diesel! Let’s break down what’s happening.

☆ Topic 1: Bouncing Back from a Tough Start U.S. refiners are expected to report much healthier profits for the second quarter, a significant turnaround from the losses many faced in the first three months of the year. While earnings aren't projected to hit the record-breaking levels of 2022 (when post-pandemic demand soared), this recovery is a very positive sign.

Some analysts had predicted a slow year with weaker demand, but the market had other plans. According to TD Cowen analyst Jason Gabelman, the industry is seeing "surprising counter-seasonal diesel crack strength." In simple terms, the profit from making diesel has been unusually high for this time of year, giving these companies a much-needed boost.

☆ Topic 2: The Power of Diesel Margins So, what's the secret sauce here? It's all about "diesel cracks," which is industry jargon for the profit margin on producing diesel. Think of it like this: a refiner buys a barrel of crude oil and "cracks" it into different products like gasoline, jet fuel, and diesel. The "crack spread" is the difference between the cost of the crude oil and the price they sell the finished products for.

During the second quarter, diesel cracks were impressively strong. TPH & Co analyst Matthew Blair noted they averaged around $17 per barrel and even ended the quarter on a high note at $21 per barrel! This strength is due to a couple of key factors:

• Low Inventories: U.S. stockpiles of diesel and other distillates hit a five-year low in May.
• Strong Exports: International demand for U.S. diesel has been very strong, further reducing domestic supply.
• Improving Demand: As economic activity picks up, so does the demand for diesel to power trucks, trains, and industrial equipment.

☆ Topic 3: A Look at the Key Players Analysts are keeping a close eye on the top U.S. refiners. Here’s what the forecasts are looking like, according to LSEG data:

• Valero: Expected to report a profit of $1.75 per share. While this is a solid number, it’s down from $2.71 per share a year ago.
• Marathon Petroleum: The largest U.S. refiner is forecast to post a profit of $3.28 per share. This is a huge recovery from its first-quarter loss but lower than the $4.12 per share profit from last year.
• Phillips 66: Also bouncing back from a first-quarter loss, it's expected to report a profit of $1.69 per share, compared to $2.31 a year prior.

The trend is clear: a strong recovery from Q1, but still playing catch-up to the exceptional profits of last year.

☆ Questions **Q1. What is the main reason U.S. refiners are expected to see higher profits in Q2?** A. The primary driver is unseasonably strong profit margins from producing diesel fuel. This is supported by low national inventories, robust export demand, and improving domestic consumption.

Q2. Are these expected profits a new record?
A. No. While the Q2 profits represent a significant recovery from the losses in Q1 of this year, they are still expected to be lower than the record-high profits reported in the same quarter of 2022.

Q3. Which major companies should we watch?
A. Key players to watch include Valero, Marathon Petroleum, and Phillips 66. They are all expected to report a return to profitability after a difficult first quarter.

☆ Conclusion In a nutshell, the U.S. refining sector is showing impressive resilience. Fueled by the surprising and sustained strength of diesel margins, these companies are turning the corner from a challenging start to the year. For investors, this marks a welcome return to profitability and signals potential stability in the energy market, at least for now. It will be interesting to see if this trend can hold up through the fall maintenance season!