Refiners Thriving on Crude Price Differential (WNR, TSO, VLO, MPC, BP, XOM, CVX, COP, MUR)

Two major oil refiners have reported third-quarter earnings since the market closed last night. Both posted better-than-expected earnings primarily due to sharply higher refining margins. Western Refining Corp. (NYSE: WNR) reported net income of $84.9 million in the quarter, compared with net income of  $6.9 million in the same period a year ago. The higher margins are due exclusively to the price differential between Brent crude and WTI crude.

Western reported that the price difference for the quarter was $23.45/barrel, and because the company buys crude at the WTI price and sells its refined products based on the Brent price, margins shot up. This may seem extortionate, but every major refiner does it for a very simple reason: why charge less for your product if consumers have demonstrated that they are willing to pay more?

Refiner Tesoro Corp. (NYSE: TSO) reported third-quarter EPS last night of $2.39, some $0.41 above the consensus estimate. The largest US refiner, Valero Energy Corp. (NYSE: VLO), posted EPS for the third-quarter of $2.11, well above estimates of $1.80. Marathon Petroleum Corp. (NYSE: MPC) reported EPS for the quarter of $3.16, way above estimates of $2.44. Refining margins also boosted earnings for the major integrated oil giants BP plc (NYSE: BP), Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP).

Murphy Oil Co. (NYSE: MUR) reported EPS of $1.73, excluding discontinued operations, compared with a consensus estimate of $1.18. The company attributed the increase to higher prices for its crude production and higher refining margins. Exploration & production revenue rose about 40%, while refining & marketing revenue rose more than 52%.

The average price of a gallon of gasoline in the US on October 31st was about $3.45, almost $0.65/gallon more than at the same time last year. On the same day, the spot price of a barrel of WTI crude was $93.19 and the spot price of a barrel of Brent crude was $108.43. On the same date one year ago, the WTI crude spot price was $81.45/barrel and the Brent crude spot price was $82.47. A gallon of regular gasoline cost about $2.82 at the end of October 2010.

The current differential between WTI and Brent is $15.24. That amount goes straight to a refiner’s top line, and puts a nice positive gain on the bottom line. Even cheaper varieties of crude, such as the heavier and more sulfurous Saudi crudes, are available and the differentials are even wider though most imported crudes are indexed to the Brent spot price. Still, every barrel that is refined in the US yields products that are priced to consumers as if the crude input were a barrel of Brent.

The Brent spot price is expected to drop as production resumes from Libya. Libya’s light, sweet crude is comparable to Brent, and the International Energy Agency expects Libyan production to grow to 600,000 barrels/day by the end of this year. OPEC has estimated that the country’s former production of about 1.3 million barrels/day could be back on-line by late next year. That will continue to moderate the Brent spot price and the differential to WTI.

The price differential between WTI and Brent is closing, if slowly, and gasoline prices should continue to fall, even if more slowly. That’s good news for US drivers and could be the best holiday gift for the weak US economy.

Paul Ausick