Oil Firms' Margin Woes Spread

For its part, Chevron reported record profits of $5.4 billion in the second quarter.

According to John Parry, senior analyst at energy-research firm John S. Herold, companies are facing difficult comparisons, both sequentially and year over year. He says this year's second quarter and the third quarter of last year are both poor benchmarks by which to measure the recent progress of refinery firms.

Last spring, geopolitical tensions in Iran and Nigeria allowed refinery crack spreads to reach as high as $30 a barrel, but the numbers were unsustainable, says Parry. "Those prices were driven by fear, greed and hedge fund speculators" rather than reasonable market fundamentals.

Likewise, the third quarter in 2006 contained its own market anomalies, Parry said. In the first storm season after hurricanes Katrina and Rita, traders had bid the prices of crude and petroleum products well above normal levels because they were scared of another catastrophic storm.

Refineries were also experiencing an abnormal number of shutdowns as they raced to adhere to new government requirements for gasoline and ethanol blends.

Sheraz Mian, an energy analyst at Zachs Financial, says that third-quarter refinery throughput figures are always lower than those from the second quarter because demand for gasoline and other petroleum products declines after the summer driving season.

Analysts usually account for this seasonal drop in their financial models. However, this year has been different than most. While demand, and thus the price, for petroleum products has fallen in the third quarter, crude oil has continued to trade at record high prices. This relationship has cut deeply into refining margins.

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