Some Good News for Refiners (in Asia)

Last Updated Feb 2, 2010 8:00 AM EST

The road for the U.S. refining industry is looking dim and rocky this year. As if 2009 wasn't a big enough doozy for U.S. refiners hit by a lack of demand and too much supply -- how's this for a little lemon squeezed on the weak margin wounds? The refinery crack spread in Singapore is estimated to rise 50 percent to as much as $4.50 a barrel this year, according to a recent Bloomberg survey. Which is great news for traders and oil companies ... in Asia.

Meanwhile, refinery margins in the U.S. -- based on futures contracts on the New York Mercantile Exchange -- will fall 35 percent by December, Bloomberg noted in its report.

A crack spread is what the profit-loss in the refining industry comes down to. If you take the value of refined fuels and subtract the cost of crude oil, you're left with what's called a crack spread. The bigger the spread, the better. And as Bloomberg notes, refinery crack spreads move according to economic growth in a particular region, demand for oil and fuel production.

Demand in U.S. and Europe has stagnated and is projected to decline. The opposite is true in Asia, where consumption of oil is skyrocketing. The Paris-based International Energy Agency projected in its 2009 World Energy Outlook more than 53 percent of the world's increasing demand for energy through 2030 will come from two countries -- China and India.

Refinery companies like Valero Energy have already been forced to idle their facilities, or more recently, shut them down for good because margins were so weak. Chevron, the second-largest U.S. oil company, announced plans recently to restructure its downstream business. The company has not detailed its plans, but many speculate they will sell off some refinery assets.

So, what's next? Since it's unlikely that demand in U.S. and Europe will suddenly spike, refineries will continue to shutter until margins improve.