JP Morgan forecasts “higher for longer” refining margins

JP Morgan forecasts “higher for longer” refining margins

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JP Morgan’s integrated oil and refining analyst Phil Gresh updated his refining forecasts Tuesday, citing a long list of bullish trends, while flagging recession risk. Phil sees current margins normalizing to nearer historic averages in 2023, but says a bad hurricane season could lead to “running out of refined products for a period of time.” Following Goldman’s bullish refining note Monday, it appears Wall Street is beginning to position for a shift in the sector. With Goldman and JPMorgan echoing points made by Saudi’s energy minister late last year.

Gresh hits on all the key themes. Demand has recovered to pre-covid levels, while ~3mb/d of refining capacity has been removed from global markets. China’s pivot on product exports has tightened Asian markets, while Russian export impacts have created deficits in Europe. In the very near term, an exit from spring refinery maintenance is expected to add 2.0-2.5mb/d of supply, though demand from the summer driving season is likely to outstrip the incremental supplies.

Along with Tuesday’s note, JP Morgan upgraded PBF (PBF) from sell to hold, following the company’s almost 140% year-to-date rally. Interestingly, Phil’s stock picks don’t reflect a particularly bullish view. He remains buy-rated on Valero (VLO), Philips (PSX) and Marathon (MPC), the three largest, lowest cost and best capitalized refiners in the US. Meanwhile, he is sell or neutral rated on lower quality operators that should benefit more from improving margins. Further evidence that while analysts and institutional investors recognize the drivers of improving fundamentals, they are positioned defensively and effectively fading the rally in commodities.

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