12 February 2016, Houston/New York — For the past six years, U.S. refiners from Texas to Philadelphia have bought every barrel of crude they can lay their hands on to cash in on a golden era of healthy margins.
Now, at least five refiners – including two of the country’s largest – have voluntarily cut output of gasoline and distillate in the most widespread cuts since the global financial crisis, moves that may deepen crude’s prolonged rout as storage tanks at Cushing, Oklahoma, the main U.S. oil hub, near capacity.
Independent refiners including Valero Energy Corp, PBF Energy INC, Philadelphia Energy Solutions and Monroe Energy, a unit of Delta Air Lines Inc, are curbing output, capitulating to record stockpiles and sluggish winter demand that have hurt profits. Even large oil companies like Exxon Mobil Corp have slashed runs.
While seasonal run cuts for work are common, reductions for purely economic reasons are rare.
If the closures gather pace and refineries curb their purchases of crude further, it will heap further pressure on prices, removing one of the last remaining pillars of support for drillers and integrated producers.
“This is going to put back pressure on crude, but you had an ongoing imbalance between supply and demand,” said Gary Ross, executive chairman of industry consultancy PIRA.
While gasoline profit margins may rebound by summer as the U.S. vacation driving season arrives, the run cuts will put pressure on crude stockpiles. Ross expects refineries to run at lower rates through March and April as refiners try to unload winter-grade gasoline.
The cuts also suggest the outlook for demand for gasoline and diesel may deteriorate before it gets better.
“No one really knows what demand will do this year,” said Dennis Cassidy, managing director and co-head of the oil, gas and chemicals practice at AlixPartners, a global consulting firm. “That’s what consensus sentiment is right now, that demand will surprise to the downside.”
Over the past year, U.S. refining margins, the estimated profit from turning oil into gasoline and diesel, have halved and are near their lowest level in five years. Refineries in the Midwest are losing cash at current prices as prices at the pump slide below $1 and oversupply continues to punish prices.
Little Wiggle Room
Refineries coast to coast cut operations in 2008, reducing crude processing and reining in spending, after getting slammed by high crude prices during the year and as demand crashed with the global economic crisis.
But the latest round of cuts may be distinct in the pressure it places on the storage hub at Cushing, where tanks are close to full, leaving little wiggle room for surplus crude to find a home.
Based on recent weekly inventory data, Cushing could run out of space as early as next month. Data shows planned maintenance this spring by refineries will be slower than expected, but economic run-cuts will likely offset the effects.
It is a marked shift in fortunes for refiners, who process crude into products like gasoline, diesel and jet fuel and were the early beneficiaries of the oil price rout.
The companies raced to buy cheap crude and pump out large volumes gasoline as demand surged in response to falling consumer prices. Profit margins for refiners rose to near-record levels on the market’s dynamics.
The companies are trying to defend profit against a downward pull from record gasoline stockpiles and sluggish winter demand.
The industry is optimistic about room for recovery in the spring, or sooner. The patterns are in line with historical norms, with low demand, low runs and low incentives to ramp up production, said Joanne Shore, the chief economist with the AFPM, a trade group representing refiners.
Because refiners need to sell off stockpiles of so-called winter-grade gasoline before they begin producing large volumes of gasoline with a chemical make-up that is more resistant to evaporation in the summer, the price of gasoline typically tumbles in March.
Tom Nimbley, chief executive of PBF, said the oversupply situation could be alleviated as refiners shift their production from gasoline to distillate fuels like diesel and jet fuel.
Still, traders say they are concerned about the outlook for refined products, and are hesitant to maintain their long positions for the summer months on the “crack spread,” an approximation of refiner’s profit.
*Erwin Seba & Kristen Hays; Jarrett Renshaw; Editing – Josephine Mason & Matthew Lewis – Reuters