Recovery of heavy crude oil supply, U.S. refiners' profitability expected to improve.

With Canadian and Middle Eastern oil production on the rise, a key driver of profitability for US refiners - the ability to purchase heavy crude oil at low prices - is expected to improve in the second half of this year. In addition to demand for core fuel products, controlling costs of raw materials also affects the profitability of refiners. Many US refineries - especially those along the Gulf Coast - have been reconfigured to process increasing amounts of discounted heavy crude oil, or to switch more easily between light and heavy crude oils. This shift makes the price difference between light and heavy crude oil a key indicator of refiner profitability. Rick Hessling, Chief Commercial Officer of Marathon Petroleum, the largest refiner in the US, said during this week's earnings call, "We expect the price differential to widen in the second half of this year." He anticipates that OPEC's production increase plan, to be completed by September, will take a month or two to reflect in global trade flows and transmit to the price differential between light and heavy crude oils. Hessling stated that Canadian oil, another major source of heavy crude oil for the US refinery system, will see lower prices when producers end maintenance and refineries along the Gulf Coast reduce operations due to fall maintenance. Gary Simmons, Chief Operating Officer of Valero Energy, stated that sanctions on Venezuelan oil and restrictions due to Canadian wildfires have limited the number of barrels of heavy crude oil transported to the Gulf Coast, partly offsetting the benefits from the shutdown of LyondellBasell's Houston refinery earlier this year. He said, "Looking ahead, we do expect things to improve, but we may not see real effects until the fourth quarter." Smaller refiner PBF Energy has also been impacted by the narrowing price differential between light and heavy crude oil. CEO Matthew Lucey said during the earnings call that the narrow price differential was a "significant challenge" in the second quarter. Prior to 2022-2023, there were about 4 million barrels of medium and heavy crude oil withdrawn from the market. Matthew Lucey stated that PBF expects profit margins to expand in the second half of this year as production returns to the market, with 2 to 2.5 million barrels per day returning by the fall maintenance season. An unexpected source of heavy crude oil returning to the market is California. Drilling companies in the state have indicated that recent regulatory policy shifts by Democratic Governor Newsom could lead to an oil drilling revival. As Phillips 66 closes its 139,000 barrels per day refinery in Los Angeles in the fourth quarter and Valero Energy closes its 145,000 barrels per day refinery in Benicia in April 2026, remaining US West Coast refiners will be able to access more California crude oil. However, sanctions proposed by President Trump against Russia could restrict the flow of heavy crude oil and push prices higher. Gary Simmons said, "The only unknown is what the sanctions against Russia will bring." "So far, we have not seen much impact. But if the sanctions are effective and reduce some of Russia's oil production, that would obviously be negative."