By Nicole Jao
NEW YORK (Reuters) - U.S. oil refiners' third quarter profits are expected to fall from last year on weakening margins as fuel demand softened and new refining capacity came online, energy analysts said.
Refiners have come off favorable pricing and strong demand after the pandemic and Russia's invasion of Ukraine boosted margins to record levels. U.S. gasoline and diesel cracks, the difference between product and crude prices, declined during the third quarter and margins slipped to multi-year seasonal lows on lackluster summer fuel demand.
During the quarter, the U.S. gasoline crack spread fell to $11.73 a barrel in September, the lowest since November 2023. The diesel crack spread traded at $17.98 a barrel in September, its lowest since July 2021.
"Cracks continue to correct from extraordinary levels from the past few years,” said TD Cowen analyst Jason Gabelman.
Fuel demand remained about 5% below pre-COVID levels during the quarter while supply out of new refineries around the world increased, putting downward pressure on cracks, he said.
U.S. refinery margins, measured by the 3:2:1 crack spread, dipped to $14.28 in mid-September, also the lowest since early 2021.
Valero Energy (NYSE:VLO), which is the second-largest U.S. refiner by capacity, is set to kick off refiner earnings on Thursday, with analysts forecasting profits of $1.01 per share, down from $7.49 a year ago, according to data from LSEG.
Shares of Valero are down around 14% since the end of the second quarter, extending losses from earlier in the year.
Marathon Petroleum (NYSE:MPC), which is the top U.S. refiner by volume, is forecast to report per share profit of $1.02 on Nov. 5, compared with $8.14 a year ago, according to LSEG estimates.
Phillips 66 (NYSE:PSX), meanwhile, is expected to report earnings at the beginning of November of $1.72 per share, compared with $4.63 a year ago, LSEG estimated.
The Houston-based refiner plans to close its 139,000-barrel per-day Los Angeles-area oil refinery late next year due to low profits.
Earlier this month, oil majors warned of a slump in refining profit margins and weak oil product trading in the third quarter.
BP (NYSE:BP), Shell (LON:SHEL) and Exxon Mobil (NYSE:XOM) cautioned lower refining margins, in part due to a slowdown in global demand for fuel and lower oil trading results, would dent their third-quarter results.
Analysts expect to see some buybacks announced by refiners despite profitability challenges.
"Without many growth projects in the hopper, refiners' free cash flow can go to paying out to shareholders," said Matthew Blair, managing director at TPH&Co.