US Refiners to Profit as Heavy Oil Output Rebounds
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A key driver of U.S. refiners’ profitability — the ability to buy heavy crude at cheap prices — is set to improve in the second half of the year as Canadian and Middle Eastern production rebounds.
Along with demand for their core fuel products, refiners need cost-effective inputs, and many have retooled plants — especially along the Gulf Coast — to process increasing amounts of discounted heavy crude or to more easily switch between light and heavy oil. That shift has made the price spread between the two grades a closely watched barometer for refiners’ earnings power.
“We expect differentials to widen out in the second half this year,” Marathon Petroleum Corp. Chief Commercial Officer Rick Hessling said on an earnings call this week. Hessling expects OPEC production increases that are set to be complete by September to take a month or two to filter through to global flows and into the price difference between heavy and light oil.
Canadian oil, another major source of heavy crude for the U.S. refining fleet, is also set to become cheaper as producers return from maintenance and the Gulf Coast plants that process the grade curtail operations for fall turnarounds, said Hessling, whose company is the largest U.S. refiner.
Sanctions on Venezuelan oil and Canadian wildfires that limited the amount of heavy crude barrels being shipped to the Gulf Coast partially offset the benefit from the shutdown of LyondellBasell’s Houston refinery early this year, Valero Energy Corp. Chief Operating Officer Gary Simmons said.
“Going forward, we do think things will get better,” Simmons said. “It’ll probably be the fourth quarter before you really see that.”
Smaller refiner PBF Energy Inc. also suffered from narrow crude differentials, which were a “significant challenge” in the second quarter, after close to 4 million barrels of medium and heavy crude were taken off the market between 2022 and 2023, CEO Matthew Lucey said on an earnings call. PBF also expects margins to widen in the second half as 2 million to 2.5 million barrels of daily output comes back by the fall, coinciding with seasonal refinery maintenance, he said.
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One unexpected source of heavy crude returning to the market is California. Recent regulatory shifts by Democratic Gov. Gavin Newsom could see an oil drilling comeback, drillers in the state say. With Phillips 66 closing its 139,000 barrel-a-day Los Angeles refinery in the fourth quarter and Valero closing its 145,000 barrel-a-day Benicia refinery in April 2026, the remaining West Coast refiners will have access to much more California crude, Marathon’s Hessling said.
“We see those as being advantaged barrels,” he said.
Still, Trump’s proposed sanctions on Russia risk curtailing heavy oil flows and boosting prices.
“The only unknown here is really what happens with the Russian sanctions,” Valero’s Simmons said. “Thus far, we haven’t really seen much of an impact. But if the sanctions are effective and cut some of the Russian barrels, that would obviously be bearish.”
