U.S. Refiners May Cut Gasoline Output on Weak Profit(Weak Profit? Huh?)

NEW YORK (Reuters) - U.S. refiners may be forced to deepen gasoline production cuts at a time of year they normally maximize output as bulging stockpiles, lackluster demand and record-high oil prices carve into profit margins.

The outlook for lower fuel production comes even as retail prices climb to new peaks heading into summer vacation season -- a factor that could lead some refiners to remain discreet about cuts to avoid a political backlash, analysts said.

"If everybody cuts too much and then all of a sudden we have some tightness ahead of Memorial Day, then you'll have a lot of questions about why they cut production ahead of the driving season," said Jim Ritterbusch, president of Ritterbusch and Associates.

The head of top U.S. refiner Valero Energy Corp (VLO.N: Quote, Profile, Research) said last week that poor profit margins had already led the company to curtail production of gasoline slightly, and analysts have said others are likely to do the same.

Refining margins typically rise in the spring as the summer driving season approaches. But this year refining margins have declined and analysts expect them to remain weak during the usually profitable summer season.

The key reason, analysts said, is that gasoline prices have failed to keep pace with record costs for crude oil.

While crude has become a darling of investors seeking to hedge against a weak U.S. dollar and capture some of the big gains in the commodities markets, gasoline has lagged as economic weakness and high retail prices soften demand for the fuel and contribute to a surge in inventories.

"It looks to me like we're going to remain under pressure as far as margins are concerned," Ritterbusch said.

Crude futures hit a record this week of $111.80 a barrel, an increase of about 83 percent since a year ago. Meanwhile, gasoline rose just more than 30 percent.

On Tuesday, the price of crude futures per barrel actually exceeded the price of gasoline per barrel for the second day in a row.

One barrel -- equivalent to 42 gallons -- of gasoline hit a premium of $2.38 per barrel to a barrel of crude, according to Reuters data -- an indication that refiners could lose money refining crude into gasoline.

"Higher prices for gasoline and heating oil may have finally reached a level where consumers have altered their energy-consumption habits," said Chris Jarvis, senior analyst at Caprock Risk Management.

The soft demand for gasoline -- currently running about 0.1 percent below year-ago levels -- has supported a surge in stockpiles. Until a small decline last week, U.S. gasoline stocks climbed steadily since early November to the highest level since March 1993, according to government data.

Meanwhile, domestic oil refiners undergoing seasonal maintenance are already showing some signs of trimming output. Refinery utilization rates dropped last week by 1.2 percentage points to 83.8 percent of capacity.

"I don't expect to see a 95 percent (refinery) operating rate come June -- we simply don't need that much production," said Tim Evans, energy analyst at Citigroup Futures Research. "I think refinery plans are going to be tailored to demand levels."

Experts said that instead of risking a political backlash with open announcements about run cuts, many refiners may decide to schedule maintenance or bring refineries up to normal rates more slowly after repairs.

"I wouldn't be at all surprised if we see some discretionary maintenance," said Sarah Emerson, director of Energy Security Analysis Inc. "You're not going to run a facility if you lose money."

While the refinery margins outlook this year cuts a stark contrast to 2007, when gasoline ran some $30 a barrel higher than crude oil and fueled record returns in the industry, it is unlikely the sector will suffer too badly in the downturn.

"This need not be terrible for refining companies in terms of their margins ... I expect them to be profitable," said Evans. "Still not the worst business to be in."

The refineries have to pay high prices for oil to refine. It makes no sense for refineries to pay high prices for oil only to build inventory at a time when demand is softening. Buy curtailing production they will also decrease the demand for oil and help drive oil prices down. Refinery margins are very thin and they make money not from the price of oil or gas, but from volume on the difference between the two.

All of this is a good sign. It means we are buying less gas, which is the only way prices are going to eventually come down.

This is just the free market working.

Somewhere along the line the oil companys are still making there billions in profit. You can bet on it.

“NEW YORK (Reuters) — Exxon Mobil Corp. posted the largest annual profit in U.S. history Thursday, even though fourth-quarter earnings fell on lower natural gas prices and shrinking gasoline margins.

For the year, Exxon Mobil earned $39.5 billion, up from its previous record $36.1 billion in 2005.”

February 1 2007

http://money.cnn.com/2007/02/01/news/companies/exxonmobil/index.htm

The fact is that gasoline demand is relatively inelastic, to a point. But when you are paying $150 to fill up the suburban, or $100 to fill up the old pickup, eventually you will see a decrease in demand. This has happened much slower because after the 70’s oil “shortages” fleet mpg averages went way higher. Therefore, even after oil broke 2 bucks, people were still paying much less of their inflation adjusted income to fillup. Even now, I remember my Pontiac Catalina got about 8-10 mpg. I was filling that car up every 200 miles. Now a similar car will get close to 20 mpg on the highway. Therefore it is using half the number of gallons to go the same mileage. So when gas was a buck a gallon you paid 20 bucks to go 200 miles. Now that its 3-4 bucks you are paying 30-40 bucks to go 200 miles. However from the 70’s to now, the dollar is probably worth .25 to .33 what it was then. So inflation and mileage adjusted you are still paying less, unless of course you own a Jeep grand cherokee which gets 13mpg. Still more than the equivalent car from the early 70’s.

The other factor is that our leaders, especially that moron Carter stoked the fears of the public and caused a massive cut in driving and the economy. Who else out there remembers odd-even rationing and gasless Sundays. I remember driving during the second energy crisis on a Sunday and seeing the empty highways. The country virtually shutdown on Sundays. This was really good for the restaurant business.

Now, there is a built in tolerance and acceptance of commodity gyrations in the psyche of the American public. They just don’t get as rattled as they once did. Obviously what we are seeing here is a decrease in driving, perhaps as much as 10 percent. This reverberates throughout the entire distribution system. Can you spell oil price krash?

Another theory, and just a theory, what if Iran and Venezuela and perhaps several other countries, to wreak a little economic havoc, sold dollars short, bought oil long, bought Euros long and did this in enormous quantities. This play for the past three years has been a winner for everyone. The number of oil futures contracts on the markets has expanded exponentially during the past three years, about 64 times according to one estimate. Consumption, worldwide peaked in 2006 and has been decreasing. This is purely a result of decrease in consumption. The demand in India and other developing countries is much more elastic than in developed countries.

So now, we have these rogue countries, economically attacking us and driving oil to $110 bucks, even in the face of decreasing demand. But all of a sudden, humongous sales of oil and purchases of dollars take place, oops, there could be several countries that find themselves in bankruptcy very quickly. Just a theory that bears watching.

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