Growth in the North American and EMEA independent refining and marketing (R&M) sector will remain flat through early 2017, but uneven demand for various products and the risk of a decline in utilization as refining margins fall pose risk for the industry EBITDA, says Moody's Investors Service. The rating agency maintains its stable outlook on the sector.

Earnings volatility will also increase in the sector as product oversupply, especially for distillates, causes crack spreads to fluctuate.

"Demand growth for gasoline, diesel and other distillates will be uneven in 2016 even as distillate inventories continue to rise, which may cause margin decline in the sector," said Arvinder Saluja, a Moody's Vice President and Senior Analyst. "There are nuanced trends within various product types that reflect a variety of industry and geographical factors."

For instance, gasoline growth in the US will remain stable in 2016, but afterwards faces a long-term decline as rising fuel efficiency and the increased use of biofuels offset the benefit from record-high driving levels and low gasoline prices, according to the report "Margins Under Strain Amid Uneven Pickup in Fuel Demand."

Meanwhile, gasoline demand will continue to grow in China, India and the Middle East as car ownership and disposable income expand in those regions. However, industrial weakness in those same developing economies, especially China, will cause demand for diesel to decline, which is typically used for trucking, agriculture, manufacturing and power generation.

Distillate inventories will continue to rise as more distillates from the Middle East, Russia and Asia seek buyers in Europe. This trend will also keep a lid on refining margins.

North American refiners will continue to benefit from their access to cost-advantaged crude from unconventional basins, but they will export less to Europe in 2016. Capacity additions in the Middle East will strain marginal refineries, especially in Europe.

And although US refiners will maintain investment to improve crude sourcing and expand market access, internal growth will continue to come from midstream expansion projects to help bring crude from unconventional basins to their refineries and cultivate profitable export markets.

Moody's notes that M&A activity among refiners will increase in 2016 and beyond. However, this could weaken the sector's overall leverage in 2016.

"North American refining and marketing companies have been using debt to fund acquisitions, raising the sector's leverage in 2016," said Saluja. "We expect refiners to spend to improve their business processes in order to keep reducing their cost structures, in preparation for future cyclical downturns and periods of weaker refining margins."
Source: Moody's