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A Fine Mess For U.S. Refineries

Jesse Bogan, 10.07.09, 05:00 PM EDT

With fuel demand low and inventories rising, Sunoco’s idling of one plant could be followed by others.

HOUSTON — Excess capacity, weak demand for fuels and rising product inventories continue to squeeze margins for U.S. oil refiners.

Sunoco ( SUN news people ), the second-largest refiner in the country that doesn’t produce its own oil, said late Tuesday that it will soon shutter its Eagle Point refinery in Westville, N.J., which has a capacity to handle 145,000 barrels of oil per day. During the second quarter, Philadelphia-based Sunoco lost $77 million in its refining business and told analysts Tuesday that the third quarter could be worse.

“We anticipated a downturn in the refining industry and took steps earlier this year to lower costs and enhance our competitive position; however, the operating environment continues to be very poor, requiring us to take further decisive action to effectively manage through the current downturn,” Sunoco CEO Lynn Elsenhans said in a statement Tuesday.

Industry observers believe the Sunoco shut-in is a sign of what’s to come. In September, Valero ( VLO news people ), the largest of the independent refiners, extended the shutdown of a refinery in Aruba and cut back capacity to process heavy oil at a subsidiary in Delaware City, Del.

Among the majors that produce and refine oil, ExxonMobil ( XOM news people ), which operates the largest refinery in the U.S. in Baytown, Texas, (572,500 barrels per day), reported a $15 million loss in the second quarter in the so-called downstream sector of its U.S. business. ConocoPhillips ( COP news people ), the fifth-largest refiner in the world, reported a second-quarter loss of $52 million in its refining and marketing business due to lower refining margins and volumes. On Wednesday, ConocoPhillips said it would sell $10 billion in assets over the next two years from its exploration and production and refining and marketing segments in order to reduce debt. (See “ConocoPhillips On The Block?”)

The situation in the sector is a sea change from 2007, a time when margins were plump and there was concern over a shortage of oil refineries in the U.S.

The demand for diesel and heating oil, known as distillates, is down 9.5% this year; demand for jet fuel is down 3.3%. Demand for gasoline, however, is up 6.2%, according the U.S. Energy Information Administration, but the retail price continues to fall. The average price of gasoline at pumps across the U.S. is $2.47 a gallon, a buck lower than this time last year; diesel is at $2.58, off $1.29.

The EIA forecasts consumption of liquid fuels and other petroleum products will be down 3.7% in 2009, following one of the harshest drops on record in the first half of 6.3%.

Argus Research analyst Phil Weiss in New York says comparing the numbers to 2008 can be slightly deceiving because demand was lower then. And while demand for gasoline is up, he says refining margins continue to be compressed.

“Even if demand is up, inventories are still rising and inventory levels are high as it is,” Weiss says. “For the past year and a half, it’s really been tough sledding and it’s expected to continue.”

More excess refining capacity is expected to be added from refinery expansions initiated way before fuel demand slumped. Marathon Oil ( MRO news people ) is expected to soon complete its $3.2 billion, 180,000 bpd expansion of its Garyville, La., refinery. Meanwhile, Motiva, the refining joint venture of Saudi Aramco and Royal Dutch Shell ( RDSA news people ), has slowed the $7 billion expansion of its Port Arthur, Texas, refinery to a crawl.

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