Wall Street Braces for Oil Refiners' Lower Q4 Earnings, Tariff Plans

As the fourth quarter of 2024 approaches, Wall Street is bracing for lower earnings from major U.S. oil refiners, with expectations of a decline in refining margins and increased tariff plans. The U.S. Energy Information Administration (EIA) reports that U.S. petroleum product exports totaled nearly 6.0 million barrels per day in the first half of 2024, the highest ever for the first six months of a year. However, the outlook for the fourth quarter is less optimistic.

Refining margins, a key indicator of profitability for refiners, are expected to decline. Marathon Petroleum's refining marker margin (RMM) averaged $13.10 per barrel in the fourth quarter of 2024, down from $16.50 per barrel in the third quarter of 2024. Phillips 66 saw margins of $14.41 per barrel in the fourth quarter, down from $19.73 per barrel the same period last year. Valero Energy saw margins of $33 a barrel for ultra-low sulfur diesel in the U.S. midcontinent and north Atlantic and $24 a barrel on the Gulf Coast during the quarter.

The decline in refining margins can be attributed to several factors. Weaker realized refining margins, increased refinery turnaround activity, and lower oil prices are all contributing to the decrease in profitability. The average Brent crude oil price in the fourth quarter of 2024 was $74.73 per barrel, down from $80.34 per barrel in the third quarter of 2024. Lower crude oil prices can lead to reduced refining margins, as the cost of crude oil is a significant input in the refining process.

In addition to the decline in refining margins, U.S. refiners are also facing increased tariff plans. The U.S. has increased tariffs on certain goods, which may impact the cost of inputs for refiners and potentially reduce their profit margins. Additionally, the U.S. has increased distillate exports to Europe, which previously imported sanctioned Russian diesel and heating oil. U.S. distillate fuel oil exports to Europe averaged 138,000 bpd in the first half of 2024, more than double the 56,000 bpd in the first half of 2023. This increased competition may put downward pressure on refining margins.

The tariff plans announced by the U.S. government have significantly impacted the competitive landscape and profitability of U.S. oil refiners compared to their international counterparts. The increased crude oil import costs, reduced exports, and disruption in global trade have all contributed to this shift in the market dynamics.

In conclusion, Wall Street is bracing for lower earnings from major U.S. oil refiners in the fourth quarter of 2024, with expectations of a decline in refining margins and increased tariff plans. The primary factors driving the decrease in refining margins are weaker realized refining margins, increased refinery turnaround activity, and lower oil prices. The tariff plans announced by the U.S. government have negatively impacted the competitive landscape and profitability of U.S. oil refiners compared to their international counterparts. As the fourth quarter approaches, investors should closely monitor the earnings reports of major U.S. oil refiners to assess the impact of these factors on their financial performance.