The Fuse

Products Markets Feel the Heat as Refiners Overproduce

by Matt Piotrowski | June 08, 2017

Total petroleum stocks rose by a massive 15.5 million bbl, the highest weekly build since 2008.

The bloodbath has spread throughout the entire petroleum complex. Oil markets are extremely bearish, and have been so since the OPEC meeting a couple of weeks ago, but the weakness has now bled into the downstream. Healthy demand and strong margins have pushed U.S. refiners to produce high volumes. That has caused the oversupply in the crude markets to undermine refined products. Against this backdrop, the entire industry is on shaky ground. There’s no way for oil bulls to spin the current situation. NYMEX WTI is down by 12 percent since May 25, the day of the OPEC meeting, while the NYMEX diesel contract has lost a similar amount. Gasoline has come off by about 9 percent in that time.

High refinery utilization has caused the oversupply in the crude markets to undermine refined products.

While U.S. crude inventories increased unexpectedly last week, halting eight straight weeks of declines, gasoline and diesel also saw big builds at a time they usually see inventory draws. Total petroleum stocks rose by a massive 15.5 million bbl, the highest weekly build since 2008 (see graphic below from Bloomberg).

bloombergstocks

The 3.3 million barrel increase in gasoline put stocks back above year-ago levels, while the 4.4 million bbl distillate build has helped inventories rebound to the same level seen at this time last year. Refiners tend to enjoy strong margins during the summer, when demand picks up seasonally, but the recent stock increases could portend a less-than-stellar performance ahead. Even though margins are coming under pressure for U.S. refiners, there are signs that demand, both domestic and abroad, will support their bottom line moving forward.

Refinery runs soar

Refinery runs have recently gone through the roof, reaching a record of 17.5 million barrels per day (mbd) a couple of weeks ago before falling back. Last week, runs dipped to 17.23 mbd, but still up more than 800,000 b/d, or 5 percent versus the same time last year. For the last month or so, the EIA pegs runs at an eye-opening 17.3 mbd, up almost 1 mbd compared to the comparable period in 2016.

refineryruns

Robust margins, coupled with strengthening domestic demand and export opportunities, motivated refiners to up their runs. The high utilization, however, has contributed to the stock builds, and in turn weakening margins. The NYMEX gasoline crack spread is now around $16.90 per barrel, still relatively strong, but below the 20-day average of $18, a sign that weakness is slowly shifting more toward products. The NYMEX diesel crack spread is holding around $13.75, versus the 20-day moving average of just above $15.

If utilization remains near current levels, there is the danger of more inventory increases and downward pressure on product prices. For the most part, when runs rise, crude stocks fall, making the 3.3 million bbl increase in crude inventories last week that much more confounding. While one week’s data doesn’t make a trend, the recent figures from the EIA were overwhelmingly bearish, and pose a threat to OPEC and other stakeholders in the market.

While one week’s data doesn’t make a trend, the recent figures from the EIA were overwhelmingly bearish, and pose a threat to OPEC and other stakeholders in the market.

Despite the recent downturn, refiners shouldn’t have to worry about a complete rout in margins, largely because of positive signals on the demand side. After slumping in February, oil demand averaged above 20 million barrels per day for March, the highest total for that month since 2007. Preliminary data for May show demand remaining above 20 mbd and gasoline at a healthy 9.6 mbd. Refiners may remain in a relatively good situation even with the current overproduction as long as demand holds up and crude prices remain weak. The EIA says that oil demand will average 19.95 mbd this year, the strongest annual total since 2007, with gasoline set to just barely break last year’s record.

High demand elsewhere is also a boon for refiners. U.S. plants, particularly those on the Gulf Coast, are feeding overseas markets at near record levels. Exports of refined products totaled 4.76 mbd over the past month, up by more than 1 mbd versus the same time a year ago.

Increased crude import dependence

Despite the uptick in domestic crude production, the U.S. is importing 8.3 mbd, a 9 percent increase versus the same time a year ago.

While the bump in demand is good for refiners and others in industry, it of course comes with a cost. Despite the uptick in crude domestic production, the U.S. is importing 8.3 mbd, a 9 percent increase versus the same time a year ago. The U.S. is still relying heavily on the OPEC cartel even with it curbing production. While preliminary data is subject to revision, 7 of the top 10 suppliers last week were OPEC members. Imports from Saudi Arabia were reportedly sliced by more than 700,000 b/d week-on-week, but supply from Iraq quadrupled to 1.14 mbd.

This past week’s data is obviously another bearish indicator in an oversupplied market. Whether the news is just another signal in a protracted downturn or the low point and the beginning of a price reversal is up in the air. One thing for sure, however, is that there are a lot of nervous actors right now in the oil market.

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