From BP’s Q2 results on Tuesday:
Indicator refining margins in the third quarter to date have been lower than in the second quarter and substantially below 2008 levels. Refining availability is expected to remain higher than in 2008, but otherwise the outlook continues to be challenging with high distillate inventories and continuing low demand.
In other words, BP will have more refining capacity operating in an environment of lower margins in 2009. This should be frustrating for the oil major which has made sizable investments especially in bringing its Texas City Refinery back to full operational capacity of 437,000 b/d over the year.
Here’s some indication of the problem via the effect on BP’s Fuels Value Chains:
Within our Fuels Value Chains, BP’s actual refining margins in the first half decreased even more year on year than the global indicator margin, as our highly upgraded facilities were impacted by a very narrow light-heavy crude spread and the collapse of gasoil cracks due to the weakening economy. Marketing volumes of refined products were down 5% in the first half, compared to the same period in 2008.
The toll on BP’s depreciating product inventory and future output, meanwhile, might be construed via the increase it’s seen in unfavourable fair-value adjustments:
Fair value accounting effects had unfavourable impacts of $126 million in the second quarter and $235 million for the half year. A year ago, there were unfavourable impacts of $161 million and $60 million respectively.
The thing to note here is the ascending hit BP is taking quarter to quarter to account for a total first-half adjustment of $235m in fair value accounting effects.