Strong refinery runs and record gasoline demand temporarily obfuscated a US oil market that remains considerably oversupplied. But these seasonal tailwinds have started to dissipate.
Throughput at US refineries has surged from a low of about 15 million barrels per day to 16.8 million barrels per day last week—a seasonal increase of about 2 million barrels per day.
US refinery activity historically has peaked a week or two after Independence Day. Refinery runs usually drop by more than 1 million barrels per day from that July top through early October, a period of relatively low gasoline demand when many refiners take capacity offline for maintenance
Refinery activity ticks up in November and December, as operators ramp up utilization rates to produce heating oil before the start of a second maintenance season that lasts through April of the new year.
The strength in US gasoline demand could push back peak refining activity by a week or two this summer. But history indicates that US refinery runs will peak before the end of July.
Some inexperienced market participants have confused seasonal strength in refinery utilization rates with a fundamental shift in supply and demand.
US oil inventories remain 96.6 million barrels higher than the five-year average for this time of year, an improvement from 112 million barrels in the spring. And that’s after a drawdown that occurred about 60 percent faster than usually.
Even if we assume that this accelerate drawdown continues, US oil inventories would end the withdrawal season about 91 million barrels per day above the five-year seasonal average.
Unless an unusually cold winter boosts heating-oil consumption or European distillate demand surges for some unforeseen reason, US inventories will start to build from a record-high level, potentially setting the stage for credible concerns about exhausting storage capacity in early 2016.
To worsen matters, US refiners continue to push their facilities hard to take advantage of strong crack spreads, an industry-specific profitability metric that compares input costs to prevailing sales prices for gasoline, diesel and other products.
But the wear and tear from running at an elevated utilization rate in hot weather could extend the length of the fall and winter maintenance seasons, exerting further pressure on oil prices.
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Elliott and Roger on Jul. 26, 2018
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