The Fuse

Refiners Adjust Well to Shale Boom, But Good Times May Not Last

by Matt Piotrowski | January 20, 2017

U.S. refinery runs recently reached record levels, which comes as little surprise for market watchers. Gasoline consumption likely set a record in 2016, while refiners have continued to export large amounts of refined products. Margins are strong, giving financial incentive to keep utilization high. However, although the industry remains strongly positioned and has adjusted well to the increasingly lighter domestic crude slate, the current record utilization levels brings the potential for supply glitches and accidents.

Although the refining industry remains strongly positioned and has adjusted well to the increasingly lighter domestic crude slate, high utilization levels brings the potential for supply glitches and accidents.

U.S. refinery throughput soared past 17 million barrels per day (mbd) for the first full week of 2017, a new record. It fell back to 16.5 mbd last week but is still above year-ago levels, keeping utilization above 90 percent. Forecasters say that runs will decline in the coming months as refiners reduce output due to typical spring maintenance, but given the strong-margin environment and the ongoing opportunities for export refiners may keep output above expectations.

Export giants

Exports of refined products have been a crucial element of refiner success this decade, as they took advantage of shortages in other regions and the flexibility provided by higher domestic crude production from the shale boom. Recently, Mexico in particular has been a major outlet for gasoline sales. “The high demand in Mexico has given Gulf Coast refiners a big opportunity,” Andrew Lebow of Commodity Research Group told The Fuse.

At the beginning of this year, Mexico hiked gasoline prices 20 percent as part of a broader energy reform, but the country’s storage infrastructure and refineries were unable to cope with the panic buying that emerged, providing opportunities for U.S. refiners. The surge in shipments to Mexico, helped recently by a new import and storage terminal at San Jose Iturbide from Port Arthur, is part of an upward trend that has been going on from some time. In October, the U.S. sent almost 400,000 b/d to Mexico, the highest level on record, allowing it to remain a net exporter of gasoline.

It’s not just the U.S.’ southern neighbor. Last year, the U.S. exported some 4.6 mbd of refined products, with Brazil, Canada, China, India, Japan, and several European countries all major buyers others than Mexico. With such a diverse customer base in the international market, U.S. refiners have had incentive to keep utilization high.

Opportunities from optionality

“[Refiners] have more optionality, giving them opportunity to run many different types of grades, anything from heavy to medium to light, sweet.”

For a number of years this decade, U.S. refiners benefited from large discounts as domestic grades traded well below international prices. But a sharp decline in shale output over the past year, rising OPEC production, and the ending of the crude export ban have brought U.S. prices more in line with those on the global market. This has cut into margins, but the industry is still seeing good times. One reason is refiners reconfiguring their plants to take advantage of local crude produced in shale fields.

“With refiners having adjusted to the crude produced from shale fields with new processing equipment and better midstream connections, they have more optionality, giving them opportunity to run many different types of grades, anything from heavy to medium to light, sweet,” John Auers of Turner, Mason & Co. told The Fuse. Auers added that this flexibility gives them the ability to react swiftly to market conditions and fluctuations in crude spreads.

“A comprehensive maintenance program would help to increase the reliability of operations” for refiners.

Although the crude processed by U.S. refiners has become lighter and sweeter, plants take in a wide variety of grades, everything from Canadian bitumen to ultralight crude produced in the Bakken.

The IEA noted in its recent Oil Market Report, that even with the growth in shale, Canadian bitumen volumes have risen over the past several years to capture more than 10 percent share in U.S. inputs, with Midwest refineries using it for about half of its feedstock. With the evolving nature of the U.S. market, the IEA argues that “a comprehensive maintenance program would help to increase the reliability of operations” for refiners, especially since high sulfur crudes such as bitumen push some units to their limit.

refiners

Demand risk looms

While a number of factors favor U.S. refiners at this moment, some uncertainties loom, any of which could undermine the industry. First of all, while the export market is strong, increased competition from new capacity and expansions in other regions have the potential to cut into U.S. refiners’ market share. High utilization also increases the risk of operating glitches or even major accidents, something that could become more of a problem if plants delay maintenance or have to increase runs during the high-demand summer period. There’s also the fact that the oil market has turned around significantly with OPEC cutting production this year, action that could keep oil prices elevated. That in turn raises feedstock costs for refiners.

A higher crude market and lower-than-expected demand at the same time would shake up the refining industry, but its hope is that current conditions will last.

But the biggest issue for refiners, as always, is demand. Over the past couple of years, downstream players have enjoyed a resurgence in gasoline demand, a surprise given that analysts had believed that consumption in the U.S. peaked last decade. The EIA sees gasoline demand inching upward by another 40,000 b/d this year, and overall petroleum consumption rising by 260,000 b/d. But this growth isn’t guaranteed. “US demand is flagging,” said Lebow. “Gasoline prices are significantly higher than this time last year, and that will have some impact.” A higher crude market and lower-than-expected demand at the same time would shake up the refining industry, but its hope is that current conditions will last.

 

 

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