War Leaves U.S. Oil Refiners With Massive Profit Gains

I'm Pierre Bien-Aimé for The Wall Street Journal, and this is What's News in Earnings, our look at some of the biggest themes standing out this earnings season. Americans are fed up with high gas prices, but pain at the pump isn't bad for everyone. What if you're selling the stuff? U.S. oil refiners, the companies that turn crude oil pumped from the ground into something cars, planes, and trains can burn, are making big profits. These are companies like Marathon Petroleum, its net income jumped more than five-fold to nearly $7.5 billion, Phillips 66, Valero Energy, and Exxon, an oil major that has huge refining operations. They're benefiting from what the industry calls the crack spread. Basically, the price of oil has risen, but at a slower rate than the price of the refined fuels these companies are putting out. The difference between those prices means more profit for refiners. Here to discuss all this with me is John Ours, market director at Marathon Petroleum. John, a few weeks ago, we at the Wall Street Journal published a prediction. We wrote that fuel makers like Valero Energy are set to crush their near-record earnings, results of the June quarter. Now that we've seen the earnings from the most recent quarter, how did those companies do? Did they set new records? They crushed new records. Back when we were moving out of the COVID lockdowns in 22 and 23, all the refiners set new records, and they've more than doubled those earnings in this latest quarter. And that's pretty much across the board, almost $10 billion by Marathon, and almost $9 billion by Valero. Yeah, those numbers referring to an operating profit measure for their refining operations. Now, how big of a deal is the crack spread for the record profits these companies are seeing? Crack spread, a bit of a funny name. I think it's named after the process of cracking, which turns a long hydrocarbon chain found in crude oil into something that is a refined fuel, like diesel, like gasoline, like jet fuel. But just to give an example of how important that is, for Valero's refineries on the Gulf Coast, the crack spread averaged about $47 a barrel in the third quarter. That's according to analysts at J.P. Morgan. And three months earlier, it was roughly $30 a barrel. So that's a $17 difference for every barrel sold. Are those numbers telling a big part of the story? You know, for refiners, that really tells the whole story. Essentially, a crack spread is gross profit margin. At a refinery, it's a different stream. The products they sell and the feedstock cost. The story of these profits is more diesel and middle distillate oriented than gasoline oriented. Again, gasoline cracks are high as well, but they're even higher for the middle distillates. Diesel and jet fuel, they're the middle part of a crude oil barrel that's distilled. The big factor behind the growing crack spread is the war in Iran, which has crippled refineries in the Middle East and Ukraine's campaign against Russia's refineries. In their recent earnings call, ExxonMobil, CEO Darren Woods gave his measure of the supply crunch due to these conflicts. Right now, I'd say a third of the shortage out there, roughly, is just the inability to get clean products out of the Middle East and into the world markets. The impact of Ukrainians bombing Russian refineries is significant as well. You know, Russia, we estimate and kind of see roughly about half of Russia's refining capacities have been taken offline. John, how are you looking at all these different conflicts in terms of which one's having the biggest effect? Well, the Middle East is the most impactful, followed by Russia and Ukraine. The U.S. has increased exports by four or five hundred thousand barrels a day since 2025. And that's not quite the number of barrels we've lost out of the Middle East and Russia, which is three or four million barrels a day. Those are round numbers I'm talking about because they fluctuate. You know, I see the Middle East situation being resolved quicker than Russia and Ukraine. And I do see more capacity coming online. And in certain places. So that's why I do see directionally the supply environment getting better. Again, subject to what happens in the Middle East and Russia and what China does. China's decision regarding exports has been up and down. They almost totally cut off product exports back in April, May. They increased them back again. Now they're feeling back again. So there's been volatility there. So a lot of things happening. They're not all geopolitical. So we have actually creeped up refining capacity. On the US Gulf Coast, you know, as we've been shutting down refining capacity on the West Coast and Exxon and Chevron are investing in projects on the Gulf Coast. Notice the earnings calls from several refineries say they're making more middle distillates. Diesel and jet fuel are those products right now. And the ones that are most short. You were talking about developments at refineries there. And indeed, they're running, you know, full tilts because of the supply crunch. What are companies saying now about wanting to squeeze more out of their refineries and how they see the refinery capacity? Problem lasting into the future? They're running as hard as they can. And they've increased middle distillate exports by almost 30% over the last year. If they hadn't done that, we'd be in a much worse state globally and potentially in a recession. You're incentivized to be even more that now as they see market environment, favorable with forecast 400,000 barrels, they have additional refining capacity growth through 2040 out of the Gulf Coast, even as the domestic demand declines. Because. Yeah. Yeah. Yeah. The U.S. is able to tap into the export markets where there's still growth. That was John Hours, market director at Novi Labs. John, thanks so much. Thank you, Pierre. Bye now. And that was What's News in Earnings. Today's show was produced by me with supervising producer Tali Arbel. Later today, we'll have the PM edition of What's News out for you as usual. And we'll be back later this earnings season diving into another industry. Until then, I'm Pierre Bien-Aimé. Have a great day. you