Refiners Rake In Cash After Gas Prices Surge; Earnings have benefitted from limited capacity, but soaring gasoline prices have started to push drivers off the road, threatening the huge paydays

U.S. fuel makers are poised to generate historic levels of cash from refining oil into gasoline and other products after fuel prices have surged nationwide.

Valero Energy Corp., Marathon Petroleum Corp. and Phillips 66, the largest three independent refiners, are set to collectively bring in about $14 billion in cash from operations this quarter, analysts estimate, the highest combined level on record according to S&P Capital IQ data.

The huge cash flows from their core business will translate into gargantuan profits as the companies report their results beginning next week, according to analysts. Investment bank Tudor Pickering Holt & Co. expects the largest eight independent refiners will report a 652% jump in earnings per share, on average, compared with the first quarter of the year, allowing some of these companies to log their highest returns in years.

Exxon Mobil Corp. this month said its fuel-making profits could climb up to about $4.4 billion in the second quarter, compared with an average of $853 million in the same periods from 2017 to 2019. That was the largest single factor in the company's forecast that earnings could be as high as about $18 billion , which would be its most lucrative quarter in at least 25 years, according to FactSet.

"We're seeing margins twice as high as the golden age," said Charles Kemp, a vice president at energy consulting firm Baker & O'Brien Inc., referring to a period of record profit levels for refiners from 2004 to 2007. Refiners back then benefited from a supply gap that emerged in part because they had virtually stopped building refineries since the last significant, new U.S. refinery was constructed in the 1970s.

But refiners' profit bonanza might have peaked already.

Record-high $5-a-gallon gasoline last month has weighed on U.S. demand during the nation's usually busy driving season. American drivers purchased almost 10% less of the fuel in the week ended July 9 and about 7.8% less in the week ended July 16, compared with the same weeks last year, according to preliminary data on same-store gasoline sales from energy-data provider OPIS, a part of Dow Jones & Co., publisher of The Wall Street Journal.

This, coupled with refineries running full tilt, has led to an uptick in stocks of gasoline that could translate into shrinking margins for refiners.

"Things have really been coming down hard," said Matthew Blair, an analyst at Tudor Pickering Holt.

A recession, now predicted by many economists , would hit fuel demand even harder. Futures prices for oil and gasoline are dropping on market fears of a looming economic slowdown.

Even when factoring in these new developments, refiners are still on track for a banner year, according to Mr. Blair.

One factor underpinning profits is that U.S. refineries closed about 1 million barrels a day of capacity during the pandemic, according to JPMorgan Chase & Co. This resulted in low inventory levels when fuel demand surged from pandemic lows as economies reopened, pushing margins higher.

Despite high crude-oil prices, some U.S. refineries are paying less than some foreign competitors for oil, one of their main inputs, which is cheaper in the U.S. than it is in Europe and other regions. U.S. crude was a little more than $3 per barrel lower Tuesday than the global benchmark, Brent. They are also paying much less than their European counterparts for the natural gas and electricity they need to run their operations.

On the U.S. Gulf Coast, estimated refining margins climbed to about $42 per barrel in the second quarter, nearly four-times higher than the average from 2017 to 2019. Excluding special items, that could lift profits for U.S. fuel makers three to four times higher than the same periods in those prepandemic years, according to RBN Refined Fuel Analytics.

Refining margins have only ever reached those heights during short-term, regional supply constraints, such as when hurricanes take multiple refineries offline, analysts said.

American fuel makers have also benefited from shipping fuel to Latin American countries and other regions where gasoline and diesel prices have been higher.

The soaring profits have also become a political liability. In June, President Biden urged U.S. oil refiners to expand capacity and accused the companies of profiteering.

John Auers, a refining-industry analyst at RBN, said refiners are concerned the Biden administration and U.S. lawmakers will take aim at the oil-refining industry again for reporting hefty profits at a time when high fuel prices are weighing on the economy ahead of midterm elections in November.

"It's going to be a banner quarter," Mr. Auers said. "Refiners, from a public-relations standpoint, are afraid of it."

The American Fuel & Petrochemical Manufacturers, the industry's main lobbying group, earlier this month laid out the factors it says are responsible for climbing profits. The cost of crude oil is the No. 1 contributor to fuel manufacturing costs, it said, urging policy makers to "stop the anti-oil rhetoric that is discouraging public and investor confidence."

Refiners are unlikely to heed Mr. Biden's calls to expand capacity, analysts said. Many of the companies project that fuel demand will soon plateau in the U.S. and other parts of the world as some countries begin to transition to cleaner sources of energy and electric vehicles. A refinery can take 20 years to recoup the initial investment, making the current business case for a new plant dim.

It remains to be seen what refiners will do with their swelling cash flows. Clean-energy projects, such as those that focus on producing renewable diesel, could provide an avenue for investments, says Baker & O'Brien's Mr. Kemp. He expects refiners will also return some of that money to shareholders and use it to fund expansion projects.