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    Refiners to Suffer if U.S. Enters Recession

    Expect profit margins and earnings to fall, according to an Oppenheimer analyst.

    NEW YORK -- U.S. refiners' earnings and expansion plans will be hurt if the U.S. -- the world's biggest economy and leading energy consumer -- falls into recession, Oppenheimer analyst Dan Katzenberg told Reuters.

    In addition, oil companies' profit margins will be squeezed further if a recession causes demand for motor fuels to drop, the report stated.
    "Our outlook for 2008 is pretty bearish for the U.S. refiners," Katzenberg told Reuters, adding that the combined earnings for four major refiners -- Sunoco, Tesoro, Valero and Frontier -- are likely to drop in 2008 by 20 to 25 percent from their 2007 levels.

    In addition, Deutsche Bank analyst Paul Sankey told Reuters refiners are one of the worst stocks to own in a recession, although stocks may be nearing the end of a steep fall, the report stated.

    "Their earnings are based on product demand growth and you won't get that in a recession," he told Reuters.

    "If we do have a recession ... refined oil products demand will drop; it happens every single time," Peter Beutel, president of energy consultancy Cameron Hanover, headquartered in New Canaan, Conn., told Reuters. He expects more people will car pool or telecommute if the economy slips, and other analysts told Reuters a recession would lessen diesel consumption by the trucking industry.

    Meanwhile, the American Petroleum Institute's chief economist, John Felmy, told Reuters he saw no major changes in consumption until people start to believe higher energy costs are more permanent and trade their big cars for smaller vehicles.

    "If you still have your job, you are still going to drive to work," Felmy told Reuters.

    However, other analysts report that margins will exhibit seasonality, even in a recession.

    "During the last three recessions, refining margins rose between 35 percent and 230 percent from January to their second quarter peak," Neil McMahon of Bernstein Research noted in a recent research report cited by Reuters.

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