Marathon Petroleum’s Refining Margin Outlook for 4Q16

Before proceeding to the outlook for 4Q16, let’s recap operating earnings trends up to 3Q16.

Marathon Petroleum’s (MPC) operating income fell 72% over 3Q15 to $435 million in 3Q16. The refining segment’s operating income plunged to $306 million in 3Q16 from $1,434 million in 3Q15. This change was due to a fall in gross refining and marketing margins by $6.5 per barrel over 3Q15 to $10.8 per barrel in 3Q16. Also, quarter-over-quarter, MPC’s refining segment earnings fell in 3Q16.

MPC’s peers Phillips 66’s (PSX) worldwide refining margin fell $6.7 per barrel over 3Q15 to $7.2 per barrel in 3Q16. Plus, Tesoro (TSO) noted a fall in its margin of $10.4 per barrel YoY to $9.1 per barrel in 3Q16. For a cross-sectional analysis of refining stocks, please see MPC, TSO, VLO, PSX: How Are These Refiners Stacking Up in 4Q16? For exposure to refining and marketing sector stocks, you can consider the iShares North American Natural Resources ETF (IGE). The ETF has ~6% exposure to the sector.

In 4Q16, per MPC, the blended LLS crack has risen $0.74 per barrel over 4Q15 to $7.4 per barrel. The LLS-WTI spread remained flat year-over-year or YoY at $1.3 per barrel. But the sweet-sour differential fell $0.17 per barrel YoY to $6.3 per barrel.

Per MPC, a dollar-per-barrel change in the blended LLS 6-3-2-1 crack spread affects its annual net income by $450 million. Similarly, a dollar-per-barrel change in the sweet-sour and LLS-WTI affects its income by $220 million and $90 million, respectively. So, in 4Q16, the YoY fall in the sweet-sour differential is likely to be offset by the YoY rise in the blended LLS crack.

However, quarter-over-quarter or QoQ, the indicators have declined. In 4Q16, the blended LLS crack has fallen by $0.69 per barrel QoQ. Also, the LLS-WTI spread and the sweet-sour differential have fallen by $0.28 per barrel and $0.04 per barrel QoQ, respectively.