Refining Tightness to Persist, Even in a Recession

By Sam Boughedda

Piper Sandler Senior analyst Ryan Todd said in a research note Monday that they believe refining tightness will persist, even through a recession.

With rising investor concerns of a recession and, to a lesser extent, fear of potential adverse policy impacts, U.S. refining stocks have pulled back by 25% since June 8th, said the analyst.

“PSC’s macro view suggests a high chance of recession in early 2023, and the historical ‘playbook’ would tell you to stay away from refiners in a recession, we see the dynamics as unique today, with margin strength driven by supply constraints, rather than demand strength,” wrote Todd. “Given system tightness, even in a severe recession (2.0 Mb/d+ of demand destruction), global utilization rates would merely approach pre-Covid ‘mid-cycle’ levels.”

As a result, the analyst reiterated HF Sinclair Corp (NYSE:) as a top pick while lowering Valero Energy (NYSE:) to a peer discount.

“As we have highlighted repeatedly over the last 6-9 months, global refining capacity is VERY tight, with 2022 utilization likely ~84%, well above the 5yr/10yr averages of 82%/81%,” added Todd. “Only in the case of 2.0 Mb/d of demand destruction would global refining utilization levels fall to ‘mid-cycle’ levels (81.9% vs. 82.3% 5-yr pre-Covid average). The reality is that we need some amount of demand destruction to prevent 2023 margins from surpassing 2022.”