US refiners may see Q2 profit recover on stronger diesel margins

U.S. refiners are anticipated to report a significant profit recovery for the second quarter, rebounding from first-quarter losses, primarily driven by unseasonably strong diesel margins. Diesel crack spreads, which averaged $17/barrel and ended Q2 at $21/barrel, were bolstered by robust exports and improving demand, leading to five-year low distillate inventories. While this counter-seasonal strength is supporting the sector, Q2 earnings for major players like Valero, Marathon Petroleum, and Phillips 66 are still projected to be lower year-over-year compared to the record profits seen in 2022.

Analysis

U.S. refiners are poised for a significant second-quarter profit recovery, rebounding from losses reported in the first quarter, driven by unexpectedly strong diesel margins. This counter-seasonal strength, which has contributed to a 20% year-to-date gain for the sector, is supported by diesel crack spreads that averaged $17 per barrel during Q2 and ended the period at a higher $21 per barrel. The margin strength is fundamentally underpinned by U.S. distillate inventories reaching five-year lows in May, a result of robust exports and improving demand. Despite this sequential improvement, earnings are projected to remain below the record levels of the prior year. LSEG data shows consensus earnings per share estimates for Valero (VLO), Marathon Petroleum (MPC), and Phillips 66 (PSX) at $1.75, $3.28, and $1.69, respectively, all of which are notably lower than their Q2 2023 results. Analysts suggest these elevated margin conditions could persist until the autumn maintenance season, providing a continued, albeit moderated, tailwind for the industry.

Key Decisions for Investors

• Investors should recognize the positive sequential earnings momentum fueled by robust diesel crack spreads, but note that much of this recovery may already be reflected in the sector's 20% year-to-date stock performance.
• It is crucial to contextualize the expected Q2 results against the prior year, as projected profits for major refiners like VLO, MPC, and PSX are still significantly lower, indicating a normalization from 2022's peak earnings environment.
• Monitor diesel crack spreads and U.S. distillate inventory levels closely, as their persistence at elevated levels through the summer is the key catalyst supporting the current positive outlook, with a potential inflection point around the autumn maintenance season.