Crude oil glut in U.S. Midwest, maintenance downtime scheduled on West Coast will help profit margins for several refiners, analyst says, but cautions that high gas prices, weak economic growth could hurt demand

NEW YORK , August 31, 2011 () – Analyst: Crude oil glut, West Coast maintenance work to help margins for several refiners

A crude oil glut in the Midwest and maintenance downtime scheduled on the West Coast will help profit margins for several refiners, according to an RBC Capital Markets analyst.

Analyst Jacques Rousseau said in a Wednesday morning research note he is raising earnings estimates for the third quarter and the full years of 2011 and 2012 for many refiners. But he also cautioned that risks to profits have increased due in part to high gas prices and weak economic growth that could impact demand.

Rousseau said Midwest refining margins remain at near-record levels because a supply glut has caused West Texas Intermediate oil prices to trade at big discounts to other light/sweet oils. He expects refining margins to average $35 per barrel in the third quarter.

"We expect this oil glut to last into 2013 or longer, depending on when adequate pipeline capacity to move oil from the Midwest to the Gulf Coast is built," Rousseau wrote.

He also said lower supply resulting from West Coast maintenance work scheduled for October will increase margins, and Tesoro Corp. will benefit the most from this. He noted that the market is isolated because few outside refineries can make fuels that comply with environmental restrictions.

Rousseau upgraded Tesoro shares to "outperform" from "sector perform." The analyst raised earnings estimates for HollyFrontier Corp., Marathon Petroleum Corp., Tesoro and Western Refining Inc.

The government said Wednesday the nation's crude oil supplies rose last week, while gasoline supplies dropped. Crude supplies increased 1.5 percent to 357.1 million barrels, while gasoline fell 1.3 percent, a larger-than-expected drop, to 208.6 million barrels.

Shares of Valero Energy Corp. rose 3.4 percent, or 76 cents to $22.76. Murphy Oil Corp. rose 3 percent to $53.11.

Tesoro shares climbed 89 cents, or 3.8 percent, to $24.42, while broader indexes rose less than 1 percent. HollyFrontier fell 38 cents to $71.92, Marathon Petroleum climbed 65 cents to $36.68, about 2 percent.

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