Why the Oil Refinery Stock ‘Famine’ Could Turn Into a ‘Feast’

Even the intense winds that Hurricane Beryl unleashed on the Gulf Coast over the past two days don’t seem to have affected the fuel market much. Margins for refining gasoline are still about half as high as they were a year ago in much of the country, according to the Oil Price Information Service (OPIS). In the past, hurricanes on the Gulf Coast have damaged refining infrastructure and reduced total outputs of fuels, lifting margins and prices. About half of U.S. refining capacity is located there.

The problem for refiners is there has been a mismatch over the past few months between how much fuel they’re producing and how much people are using. Refiners were making very strong margins at the end of the first quarter, so they decided to keep pumping fuel out at a high rate instead of shutting down for maintenance, as they often do. But a warm winter and early spring cut demand for fuels used in heating, and driving demand has been uneven. In its latest weekly report, the Energy Information Administration said that U.S. inventories of gasoline were 6% above last year’s levels—a sign that so much is being made that companies are storing it rather than selling it to drivers.

The decline in margins has weighed on refining stocks. The VanEck Oil Refiners exchange-traded fund is down 1% over the past month, even as the

S&P 500

is up 4%. Shares of leading U.S. refiners

Marathon Petroleum

and

Valero

have both fallen 5% in the past month.

But Goldman Sachs analyst Callum Bruce expects that the “famine” in refining stocks “pivots towards feast” in the weeks ahead. For one thing, more refiners will eventually have to slow operations to conduct maintenance, he predicts. “Deferring maintenance isn’t a sustainable tactic and it needs to be undertaken eventually,” Bruce wrote. “The recent weakness in margins has already led to a refining response, with reports of run cuts and some maintenance being pulled forward again, from later this year.”

In addition, soaring heat around the world this year is likely to result in an increase in oil demand. Some parts of the world, including the Middle East, use oil products to generate electricity, and could use more as they run air conditioners.

And even though Hurricane Beryl didn’t damage much refining infrastructure, it likely won’t be the last major storm in the area. Forecasters are expecting one of the most severe hurricane seasons in years—exacerbated by record temperatures in the Atlantic Ocean, the La Niña weather pattern, and climate change. If any of those storms damage infrastructure, refinery margins and fuel prices could soar—and the stocks of refiners too.

Write to Avi Salzman at avi.salzman@barrons.com

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