U.S. refiners are ramping up their crude processing gradually – relying on recovering consumption to erode excess fuel inventories accumulated during the most intense period of lockdown, as reported by Reuters.
The strategy is broadly working for gasoline but persistent weakness in distillate fuel oil consumption has sent stocks to their highest level since 1982, which threatens to weaken crude demand over the next couple of months.
Refiners raised crude processing to 14.3 million barrels per day (bpd) last week, up from 14.0 million bpd the week before and 12.7 million bpd in early April (tmsnrt.rs/3iPwmvc).
But processing is still down by more than 16% compared with the previous five-year average, according to the U.S. Energy Information Administration (“Weekly petroleum status report”, EIA, July 8).
Consumption, proxied by the total volume of products supplied to the domestic market, was down by only 12% last week compared with the five-year average.
By ramping up slowly, refineries have managed to keep most fuel stocks under control and limit the downward pressure on their margins.
INVENTORY CONTROL
The effects of the strategy are most evident in gasoline, their largest output by volume and the most important driver of income.
Gasoline production has been accelerated in close alignment with consumption, or even slightly slower, and stocks have fallen by 12 million barrels since mid-April.
Gasoline stocks are now around 8% above the five-year average, down from more than 10% at the height of the lockdown, and there is a clear downward trend.
But recovery in distillate consumption has been much more sluggish and uneven. As a result, refiners have been left making too much despite shifting their processes to maximise gasoline output and reduce distillate yields.
Distillate stocks have continued to climb, hitting 178 million barrels last week, which was 39 million barrels (28%) higher than the five-year average, and the highest level for almost 38 years.
Distillate stocks are currently equivalent to 59 days of consumption, up from 38 days at the same point last year and a five-year average of 37 days.
Bloated distillate stocks suggest refiners may have to double down on their strategy and restrain output even further over the next few weeks to get diesel stocks under better control.
In a development that will worry refiners, there have also been some signs the recovery in gasoline consumption has also started to taper, with week on week growth rates decelerating since the start of June.
Unless fuel consumption starts to pick up more slowly, refineries may have to pause their planned ramping to allow more distillate inventories to be absorbed.
If refiners do pause their recovery over the next few weeks, it will create a headwind over the summer for OPEC+ as it tries to reduce crude oil inventories and lift prices.
(John Kemp is a Reuters market analyst. The views expressed are his own)
Editing by David Evans
