Refiners alert to avoid a US products glut

OREANDA-NEWS. May 18, 2015. US independent refiners will depend on higher domestic demand and growing exports to prevent a record crude inventory from becoming a profit-crushing products glut.

Massive volumes of crude in storage have helped to drive refining margins and throughputs higher in 2015. Refiners ran at their highest levels since at least 2010 in the first quarter.

But with considerably less storage space for refined products than for crude, and a shaky demand outlook, refining executives are wary about the future.

"There is risk, obviously, that a lot of this crude surplus ends up as product in tank," HollyFrontier chief executive Mike Jennings said in the recent first quarter earnings call. "But our job is to run the plants and provide good markets in which to place them."

US crude inventories swelled to record highs this year amid contango conditions. Crude in commercial storage has held at its highest levels in 80 years of Energy Information Administration (EIA) data, reaching a peak of 490mn bl in late April. The volume was more than 94pc of US refinery and crude tank farm storage capacity, according to the EIA. Refiners watched for capacity at the crude oil storage hub in Cushing, Oklahoma, to fill to the brim, and for barrels moving on to the US Gulf coast to further pressure waterborne prices.

US midcontinent and Gulf coast refiners have meanwhile processed crude in the early part of the year at rates more common to summer's peak. Midcontinent refiners shattered seasonal throughput records, running 200,000 b/d higher than the five-year average for the region. Net gasoline production in the midcon, though still below 2014 levels, has run among its highest volumes in ten years.

With such strong run rates the industry risks creating its own, less discussed refined products glut.

Seasonal requirements limit how long products can stay in storage, compared to crude, and the US operates much less storage capacity for refined products than the raw material. US refiners and terminals have gasoline and gasoline blendstock storage capacity of 333mn bl, less than two-thirds of crude's shell capacity, and diesel storage capacity is roughly 40pc of crude's storage volume, at 221mn bl.

Roughly 68pc of US gasoline storage is full and 4.5mn bl above the five-year maximum last week, according to the latest EIA data.

US refiners have far more options for moving their products to customers than domestic crude producers, however.

Low prices have helped increase US gasoline demand to levels typically seen later in the summer. Total US gasoline supplied, a measure of implied demand, rose by 416,000 bl last week to 9.2mn b/d, its highest level for the week since 2009.

Increases in auto sales, especially more gasoline-demanding truck and large vehicle sales, have kept refiners optimistic heading into the peak driving season.

"Certainly on gasoline, in terms of miles driven, the type of automobiles that are being bought here in the United States at the present time, we see a pretty good environment going forward," PBF Energy chairman Tom O'Malley said.

And improved logistics and developing export markets in Latin America have allowed US Gulf coast refiners to find a home for refined product barrels once destined for the US midcontinent. This shift has in turn given US midcontinent refiners more room to place their barrels, and to seek out new incremental markets along the edges of their traditional region.

"I think the export market is going to give, not just Marathon, but the industry, a solid performance going forward," Marathon Petroleum chief executive Gary Heminger said.

But executives were watching retail numbers carefully through the first half of the second quarter. Second-quarter gasoline demand has shown less sustained strength than 2011 and 2010. And Heminger cautioned EIA demand estimates appeared overstated.

"I think as we get out into the second quarter we'll have a much better barometer on how gasoline is going," Heminger said.