US refiners have cut seasonal crude processing sharply since the start of the second quarter, averting a potential oversupply of gasoline and distillates, but worsening the build-up of crude stocks.
US refiners have processed an average 16.64 million barrels per day (bpd) of crude since the start of the year compared with 16.94 million bpd at the same point in 2018.
Some of the loss can be attributed to the destruction of the 335,0000 bpd Philadelphia Energy Solutions refinery by fire near the end of June (“Old corroded pipe led to Philadelphia refinery fire”, Reuters, Oct. 16).
But refiners started running below prior-year rates from March, before the fire, and have cut processing sharply after the end of the summer driving season to the lowest level since 2016.
Refiners on the East Coast, site of the PES refinery, have cut processing by an average by an average of 137,000 bpd so far this year, according to data from the US Energy Information Administration.
But refiners on the Gulf Coast have also reduced processing by an average of 121,000 bpd so far and on the West Coast by 54,000 bpd (“Weekly petroleum status report”, EIA, Oct. 30).
Slower economic growth at home and abroad, especially in manufacturing and freight transport, and sluggish fuel consumption has given refiners little incentive to maximise production.
Reduced processing has gradually tightened the markets for gasoline and distillates and pushed up refining margins for both fuels.
Gasoline stocks have swung from 15 million barrels above the prior-year level in January to almost 7 million barrels below in late October.
Distillate stocks have swung from a 15-million-barrel surplus over prior-year in late July to a 7-million-barrel deficit in late October.
Gross refining margins for gasoline delivered in January 2020 over Brent have steadily climbed to almost $7 per barrel from virtually zero earlier this year (the corresponding margins over WTI are $12 and $6).
Gross margins for distillate delivered in January 2020 firmed to more than $21 in mid-October, up from $17 in June (margins over WTI were $27 in October and $23 in August).
More recently, distillate margins have tumbled by around $2 in late October amid evidence stocks have started creeping up again.
Firming margins have reflected refiners’ restraint and quick response to signs of poor demand rather than strong growth in fuel consumption.
Gasoline supplied to domestic customers was actually down by 12 million barrels (0.5%) in the first eight months of the year while distillate supplied was also down by 12 million barrels (1.2%).
Nonetheless, refiners’ success in responding to the slowdown in consumption and avoiding a big build in stocks has been enough to draw support from hedge funds.
Hedge funds and other money managers have purchased the equivalent of 28 million barrels of US gasoline futures and options and 18 million barrels of distillates since the start of September.
Position-building has accelerated the rise in gasoline and diesel prices and margins in recent weeks, but further price and margin gains will likely depend on an improvement in demand.
John Kemp is a Reuters market analyst specialising in oil and energy. Before joining Reuters in 2008, he was an analyst for Sempra Commodities, now part of JP Morgan and Mercuria. He holds a degree in Philosophy, Politics and Economics from the University of Oxford.