Nicole Jao reporting from New York shares some tough news for Wall Street, which is getting ready for a potential fall in profits for U.S. oil refiners this fourth quarter. There’s been a noticeable dip in fuel demand, and everyone’s watching closely to see how the industry plans to handle President Donald Trump’s looming tariffs on oil from Canada and Mexico.
Reflecting back on 2022, refiners enjoyed soaring earnings owing to a surge in fuel demand post the COVID-19 pandemic and the geopolitical instability from Russia’s actions in Ukraine. But that wave seems to have subsided. Now, with President Trump promising to introduce a hefty 25% tariff on Canadian and Mexican oil imports, starting February 1, refiners face the threat of increased crude costs, adding pressure to their profit margins.
For the second year running, retail gasoline prices in the U.S. have dipped, partly because summer 2024 saw less demand for this staple fuel compared to 2023. As a result, inventories swelled, and according to the EIA, prices in the latter half of 2024 were about 10% lower than in the same period the previous year.
The price difference between U.S. gasoline futures and West Texas Intermediate crude, known as the crack spread and a key indicator of refinery profit potential, sank to just under $11 a barrel in December—its lowest in a year. Similarly, the spread for ultra-low sulfur diesel futures dropped to nearly a two-month low, falling below $22 a barrel.
“We’ve really seen refining margins take a hit, and crack spreads are pretty slim,” comments Stewart Glickman from CFRA Research. “We’re anticipating some lukewarm earnings for the fourth quarter.”
Valero, the second-largest refining company in the U.S. by capacity, is set to report its earnings on Thursday. Analysts are bracing for a steep drop in profits, estimating a modest earnings of 7 cents per share as opposed to last year’s $3.55 per share, based on data from LSEG.
Marathon Petroleum is in a similar boat, with projections of earnings at 12 cents per share, down from $3.98 the prior year. Likewise, Phillips 66 is expected to report a loss of 23 cents per share compared to last year’s $3.09 per share earnings.
The industry’s giants, BP and Exxon Mobil, hinted earlier this month that their fourth-quarter profits might also take a hit due to the refining margins shrinking.
Stock prices are reflecting these challenges as well. Valero’s shares have dipped more than 6% this year, Phillips 66 is down over 15%, and Marathon Petroleum finished 2024 with an 8% loss.
As earnings announcements roll out, investors are eager for insights on how refiners plan to offset the potential shakes from the tariffs targeting oil from Canada and Mexico. On Tuesday, the White House reiterated Trump’s intention to roll out these tariffs on February 1.
Canada, having consistently been America’s leading oil import source for over two decades, accounted for more than half of U.S. crude imports last year. The impending tariff could raise costs significantly, particularly for refiners in the Midwest that process around 70% of the Canadian crude imports.
“Refiners have to be ready for this possible scenario,” explains Brian Kessens from Tortoise Capital. Many refining facilities in the U.S. are set up to process heavier oil varieties, which predominantly come from Canada and Mexico. To guard against the potential tariff fallout, some have already ramped up their purchases of Canadian crude at the year’s end.
Recent data from the EIA revealed that U.S. crude imports from Canada jumped by 689,000 barrels a day to 4.42 million bpd in the week ending January 3—marking the highest level since June 2010.
TD Cowen analysts noted that HF Sinclair, Phillips 66, and Par Pacific Holdings have substantial exposure to Canadian crude, while companies like Delek and Valero are less exposed.
This coverage was put together by Nicole Jao in New York, with editorial assistance from Liz Hampton and Marguerita Choy.
