Don't Touch the Refiners Until You Understand a Few Things About Their Future

The refinery stocks are in the news, here is a great ThomsonReuters article that will give you a good perspective on how to approach trading the refiners. Obviously they are going down hard, have they hit bottom?

"Inland U.S. oil refiners stung by renewable energy credits"

By Krishna N Das and Swetha Gopinath April 3 (Reuters) - Landlocked U.S. oil refiners short on capacity to blend ethanol are bracing for a spike in costs, unable to export their way out of a sudden rise in the price of renewable energy credits needed to comply with government requirements.

CVR Energy Inc and HollyFrontier Corp, inland refiners with limited capacity to blend biofuels into the pipeline, are suffering from a jolt to investor confidence while stocks of their coastal peers continue a two year upward march.

Along with some East Coast refiners like PBF Energy Inc , they are at the sharp end of the uneven distribution of pain resulting from a hundred-fold surge in the cost of ethanol credits.

Refiners are caught between the U.S. ethanol mandate, which requires ever-higher volumes of ethanol to be blended into the domestic gasoline pool, and the limited amount of the corn-based fuel that some cars can safely run.

To offset the difference, refiners must either export gasoline to markets not requiring the blend or buy up ethanol credits that can satisfy government requirements without forcing higher volumes of ethanol into gasoline.

The price of these credits, or Renewable Identification Numbers (RINs), has spiked to more than $1 in recent weeks from 1 cent in December due to concerns of a looming shortfall.

That price rise may prove a serious drag on the bottom line of CVR Energy, for example, whose refineries in Oklahoma and Kansas have neither easy access to foreign markets nor integrated systems to blend ethanol into gasoline themselves.

"If you are in the middle of the country with no access to waterborne markets, and don't own any blending component of the value chain, it could be a disadvantage," said John Williams, investment analyst at T. Rowe Price in Baltimore , Maryland.

The ethanol mandate was conceived during the administration of President George W. Bush, when domestic gasoline demand was projected to grow steadily, increasing the need for foreign oil.

Since then, however, the U.S. shale boom has seen domestic production boom, while gasoline demand has been in decline.

Refiners are therefore obliged to blend more ethanol into a smaller gasoline pool. Older cars face possible engine damage if fuel contains more than 10 percent ethanol, creating a "blend wall" that refiners are loath to exceed for fear of incurring liabilities.

The ethanol requirement is set to grow every year until 2022. Many oil companies have complained about the mandate, and warned that more costly RINs will drive up prices at the pump. "This failed federal program is already costing consumers and taxpayers dearly," said Tina Barbee, spokeswoman for Tesoro Corp, the largest independent refiner on the West Coast.

West Coast refiners are better placed to export than their East Coast peers, which typically refine imported oil. Tesoro's strong retail presence has also helped shield it from higher RIN costs, said Raymond James & Associates analyst Stacey Hudson. "(East Coast refiner) PBF, on the other hand, does not have a retail presence and that could be seen as a disadvantage for generating RINs," she said. "If you produce more fuel for domestic consumption than you blend, you will be short on RINs." PBF declined to comment.

Its shares have fallen 11 percent in the past month. Tesoro's stock has fallen less - 3 percent - but is still underperforming shares in companies with refineries on the Gulf Coast , which export more gasoline.

Natural Hedge

The Thomson Reuters U.S. Oil & Gas Refining and Marketing index, which includes shares of almost all U.S. refining companies, has risen 28 percent over the past two years as cheap shale crude has propped up margins.

Refiners in the U.S. heartland have seen the benefits of easy access to rising volumes of relatively cheap domestic crude. But CVR and HollyFrontier have started to buck this trend; both stocks are down 10 percent in the last month.

Macquarie Research cut its ratings last month on both companies. RIN pricing, it said, was a big enough issue to warrant longer-term concerns.

"The refiner stocks have performed exceptionally well for two years running, thus we recommend taking profits on those with the greatest RIN risks," Macquarie analysts said in a note.

Refiners with blending facilities to help offset RINs risk, or which can export more gasoline, are seen as better protected. Marathon Petroleum Corp's stock has risen 6 percent and Phillips 66 is up 9 percent in the last month.

"They have a natural hedge through that (blending), and they also have access to export markets through their Gulf Coast operations," said Williams, whose firm owns Phillips 66 shares.

Though the company has not explicitly linked its expansion to RINs, Phillips 66, the refining company spun out from ConocoPhillips, has said it will have the infrastructure needed to raise exports by about 40 percent within three years.

Material Costs

Leading independent refiner Valero Energy Corp -- also in the T. Rowe Price portfolio -- says it expects its RIN-related costs to jump to as much as $750 million this year from $250 million in 2012.

Unlike CVR and HollyFrontier, Valero has the option of raising exports from its Gulf Coast refineries. But the company is also a significant spot seller of unblended gasoline in the United States ; its stock is down 7 percent in the last month. Macquarie said the large volumes of unblended gasoline in the company's Gulf Coast system, which it estimated at 2.2 billion to 2.3 billion gallons in fiscal 2013-14, threatened to overshadow its exports.

Further inland, meanwhile, CVR Energy is limited in what it can export. The company, controlled by billionaire investor Carl Icahn, said in a regulatory filing last month that its RIN costs were likely to be "material".

"There's no way that the RINs cost will not get passed on," Chief Executive Jack Lipinski said on a post-earnings conference call. "Eventually somebody has to pay it." At $1 per gallon, RIN credits adds 10 cents per gallon to gasoline prices, which cost about $3.68 per gallon on an average for March, compared with $3.39 in January, according to the U.S. Energy

Ultimately, much is likely to depend on how successful those refiners short on RINs will be in passing on costs to consumers. Valero spokesman Bill Day said: "We expect to see prices of gasoline go up across the country." Bradley Olsen, analyst at investment bank Tudor Pickering & Co, said comparatively high gasoline prices on the East Coast were at least helping refiners there to balance their RIN costs.

"The U.S. market still needs close to 9 million barrels a day of gasoline. The short term solution is to export to avoid the RIN obligation but, ultimately, increased exports reduce the supply domestically," he said. "You are going to see prices rally."

Posted courtesy of ThomsonReuters


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EIA Publishes Monthly Biodiesel Production Data for 2010 and 2011

U.S. production of biodiesel was a record 109 million gallons in December 2011, according to new data released by the U.S. Energy Information Administration (EIA). Production came from 113 active biodiesel plants. Biodiesel production for all of 2011 was 967 million gallons, which was the highest level recorded since EIA began tracking this data. Biodiesel fuel is mainly used for transportation, similar to diesel fuel.



Monthly biodiesel production had both sharp increases and decreases in 2009 and 2010 due in part to the expiration and reinstatement of Federal tax credits and renewable fuels standards affecting biodiesel. After reaching 64 million gallons in November 2009, biodiesel production fell following the expiration of the blending tax credit of $1.00 per gallon at the end of 2009. With the December 2010 reinstatement of the blending tax credit effective through December 2011 and increased requirements for biomass based diesel under the renewable fuels standard, production rebounded from a low of 22 million one year before.

Annual biodiesel production was 516 million gallons in 2009. Production fell to 343 million gallons in 2010 but then rebounded to 967 million gallons in 2011.

Soybean oil was the largest biodiesel feedstock in 2011, at 4,136 million pounds consumed. The next three largest biodiesel feedstocks during 2011 were canola oil (847 million pounds), yellow grease and other recycled feedstocks (665 million pounds), and white grease (533 million pounds).


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EIA: Natural Gas and Renewable Shares of Electricity Generation to Grow

Over the next 25 years, natural gas and renewable fuels gain a larger share of the United States generating mix of electricity, according to the Annual Energy Outlook 2012 (AEO2012) early release reference case. Coal remains the dominant source of electricity, but its share drops from 45% in 2010 to 39% in 2035.

These results are from the AEO2012 Reference case, which assumes no changes in current laws and regulations. The full report will include additional cases measuring the impacts of alternative policies and different paths for prices and technologies on the electric power sector.

• Annual generation from natural gas increases by 39% from 2010 to 2035. Eighty-five gigawatts of new gas capacity is added through 2035, as stable capital costs and low fuel prices make it the most attractive source of new capacity.
• Renewable energy generation grows 33% from 2010 to 2035. Non-hydro renewables account for a majority of this growth, with wind, solar, biomass, and geothermal generation all significantly larger at the end of the projection horizon.
• Coal's share of the electricity generation mix drops from 45% to 39% between 2010 and 2035. Thirty-three gigawatts of coal capacity are retired and only 14 gigawatts of new coal capacity already under construction are completed. A few factors disadvantage the relative economics of coal-fired capacity: projected low natural gas prices, the continued rise of new coal-fired plants' construction costs, and concerns over potential greenhouse gas emissions policies.
• Annual generation from nuclear power plants grows by 11% from 2010 to 2035, but its share of the generation mix declines. A total of 10 gigawatts of new nuclear capacity are projected through 2035, as well as an increase of 7 gigawatts achieved from uprates to existing nuclear units. About 6 gigawatts of existing nuclear capacity are retired, primarily in the last few years of the projection.

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