Commentary: Falling cost of crude can't fix weak demand
Crude-oil prices were down again Tuesday, bumping along at around $39 a barrel. This should be music to ears of the nation's independent refiners. Instead, it's a screeching discord confusing both the refiners and investors.
Shares of Valero Energy and Sunoco Inc. , the nation's two biggest independent refiners, were both down more than 2% midday despite the continued erosion of oil prices.
The slide could signal the end to an edgy honeymoon ushered in when oil prices -- a refiner's single biggest cost -- began plunging from an all-time high of $147 a barrel in July.
Obviously, refiners have not emerged from the economic meltdown unscathed. Valero shares are down 71% from a year ago. Sunoco, one of the group's better performers, is down 42%. Tesoro Corp., Frontier Oil Corp. and Western Refining Inc. are all down at least 70% over the past 12 months.
But when oil hit four-year lows, most of the group broke free of the broad market. Valero shares, after bottoming Nov. 20, surged 46% as the company basked in a pool of cheap crude, outpacing a 15% bounce-back by the S&P 500 over the same period.
But cheaper feedstock is only half of the equation, as Monday's of bankruptcy privately-held refiner Flying J Inc. shows.
The Ogden, Utah-based company, which runs the nation's biggest diesel fuel retail distribution business, filed for Chapter 11 because the severity of the economic downturn and steep drop in diesel demand overwhelmed the benefits of falling oil prices. With refining margins shrinking and credit markets seized, Flying J could simply no longer pay the bills.
Those same market fundamentals are bearing down on other refiners. Several, including Valero, have cut runs, which means they are running less crude through their refineries in a bid to boost profit margins by reducing supplies in a market already awash in gasoline.
At the same time they are cutting capital spending and seeking buyers for non-performing assets as they hunker down for a long, deep recession.
That recession will end someday, at which point fuel demand will grow and margins will improve for those strong enough to survive. And they stand to make a bundle. That's because the nation's refining capacity has been woefully inadequate for years (remember Hurricane Katrina?) and it's not going to get any better in 2009.
So now's the time to pick winners. Their names will likely be announced in a year or two, whenever Congress next feels the urge to hold a round of hearings on price gouging.
