Why is there a problem with fuel filters?

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Gasoline prices have risen sharply in recent months, and overall demand for oil is expected to rise sharply again next year. But not all companies are good at refining crude oil. Of course, his attitude toward American filters seems very bad.

This is according to a new report by Citigroup analyst Prao Rao, which has lost a number of shares in the industry due to a series of negative trends.

One big problem is that companies around the world are building more filters, but the demand is not growing fast. That is a bad sign for filmmakers in general, and may indicate weak margins in the front. A.D. By the end of 2024, capacity increases could exceed 1.1 million barrels of filtration per day, and growth demand is unlikely to fill that gap, according to Rao projects.

The second problem with US filters is that they have lost some of their geographical value. For years, oil in the United States traded for less money than elsewhere. The West Texas Medium, U.S. standard, trades for a few dollars less than Brent, typically international standards. It has to do with the difficulty of transporting some of the American pulp – pipelines have stopped growing in some key areas. Crude oil can accumulate in centers and storage tanks and cause prices to fall.

But with manufacturers cutting off new projects, oil reserves are declining, and WTI is trading at a small discount for Brent. U.S. refineries like to expand because they can buy oil cheaply and sell products off the coast. Now, that benefit is disappearing, and Rao expects the trend to continue. WTI traded at a discount of less than $ 4 on Thursday. Less than $ 7 in 2018.

In general, investors have reduced the amount they are willing to pay to investors, Rao wrote. He said estimates for shareholders have fallen 20% from 2019 levels based on their mid-cycle earnings.

Based in part on that ranking, Rao thinks many filters are now less attractive investments. He lowered it

Deleck American Holdings

(Marking DK) to sell from an independent, and

CVR Energy

(CV) and

Phillips 66

(PSX) From neutral to neutral. On Thursday, Delex fell 2.6%, CVR decreased by 3.1%, and Phillips 66 fell 1.9%.

In the long run, they think Rao will need other features to make the filter shares attractive. He loves

Valero Energy

(VLO), for example, because it has a promising low carbon energy business. The company has recently been making money from renewable energy in other areas. Valero fell 0.8% on Thursday.

Rao has also improved

Marathon Petroleum

He thinks the company has made progress by cutting costs and improving its return on capital to buy MPC. Nevertheless, he lowered his stock price to $ 67. On Thursday, it was down 0.5% to $ 58.35.

Write to Avi Salzman at avi.salzman@barrons.com