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BP’s Refining Marker Margin Sank in 2Q16

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BP’s refining capacity

Before we analyze BP’s (BP) refining marker margin (or RMM), let’s quickly look at BP’s refining capacity. BP has 1.8 MMbpd (million barrels per day) of refining capacity spread worldwide. In the United States, BP has around 0.74 MMbpd of refining capacity located in the Northwest and East of the Rockies.

Around 0.85 MMbpd, another large portion of BP’s refining capacity, is located in Europe, spread over Germany, the Netherlands, and Spain. BP has a combined capacity of 0.26 MMbpd in Australia, New Zealand, and South Africa.

BP’s peers ExxonMobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A) have refining capacities of 5.1 MMbpd, 1.8 MMbpd, and 3.1 MMbpd, respectively.

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BP’s refining marker margin

BP’s income from refining operations is primarily dependent on refining margins and crack spreads. BP closely tracks refining margin market indicators such as the USMW (US Midwest), the USNWC (US Northwest Coast), the NWE (North West Europe), and the Med (or Mediterranean).

Plus, the company calculates an RMM. According to BP, RMM is “the average of regional indicator margins weighted for BP’s crude refining capacity in each region. Each regional marker margin is based on product yields and a marker crude oil deemed appropriate for the region. The regional indicator margins may not be representative of the margins achieved by BP in any period because of BP’s particular refinery configurations and crude and product slate.”

In 2Q16, the company’s Downstream segment’s earnings fell by 19% compared to 2Q15 due to narrowing refining margins. The USMW’s margin fell steeply by $4 per barrel over 2Q15 to $17.2 per barrel in 2Q16. The USNWC’s margins fell by $8 per barrel to $20.1 per barrel. NWE’s and the Med’s margins fell by 34% and 35%, respectively, over 2Q15 to $11.3 per barrel and $9.6 per barrel, respectively, in 2Q16. BP’s average RMM fell by $6 per barrel over 2Q15 to $13.8 per barrel in 2Q16.

The iShares U.S. Energy ETF (IYE) has ~42% exposure to integrated energy sector stocks.

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