15 July 2016, London — U.S. refiners and motor fuel blenders made too much gasoline during the first half of 2016 and now the market is struggling to clear the resulting overhang of gasoline stocks.
Refiners and blenders tilted production heavily towards gasoline and away from distillate production during the first six months in response to market price signals.
Gasoline accounted for 46.3 percent of the output from U.S. refineries in April 2016, up from 45.2 percent in April 2015, according to the U.S. Energy Information Administration.
At the same time, distillate yield was cut to 27.8 percent in April this year compared with 29.2 percent at the same point last year.
The same pattern has been in place since the start of the year with refiners focusing on maximizing gasoline and minimizing diesel production.
Gasoline yields were up compared with the prior year in January (+3.4 percentage points), February (+1.7 percentage points) and March (+1.4 percentage points).
Distillate yields were down compared with the prior year in January (-2.5 percentage points), February (-1.1 percentage points) and March (-0.9 percentage points).
The focus on gasoline appears to have continued throughout May and into June, according to weekly statistics published by the Energy Information Administration.
The ratio of gasoline to diesel production has averaged 2.07:1 over the last 13 weeks, the highest level since 2012.
The emphasis on gasoline was a rational response to fuel prices which rewarded refiners more for producing gasoline than diesel in the first four months of the year.
Distillate demand was unusually low at the start of the year and stocks were at the highest level since 2011 as a result of an unusually warm winter and sluggish freight movements.
At the same time, gasoline demand was growing strongly and the forthcoming driving season was forecast to be the strongest on record.
Gasoline prices moved to a substantial premium over diesel and refiners responded by switching their production plans.
Hedge funds encouraged and accelerated the shift by building a large bullish position in gasoline futures and options and a bearish one in heating oil.
Since April, the structure of prices, stocks and hedge fund positions in distillates and gasoline has been reversed. Diesel prices have moved to a large premium over gasoline.
Diesel stocks have drawn down while gasoline stocks have remained stubbornly and unseasonably high. Hedge funds have built a large bullish position in heating oil and taken a relatively bearish view on gasoline.
The summer driving season has been a strong one but not strong enough to absorb all the extra fuel that refiners have produced during the first six months.
Both hedge funds and refiners appear to have over-estimated the growth in gasoline demand in 2016.
Gasoline stockpiles, especially on the East Coast of the United States, are far above normal seasonal levels.
The market is now sending a strong signal to refiners to cut gasoline output and switch production plans towards distillate.
Futures prices are anticipating a colder winter in the northern hemisphere in 2016/17 and a gradual pickup in freight demand both of which would boost distillate demand.
Refiners have already begun to cut crude processing and switch output to distillates, but it will likely take 1-2 months to bring gasoline stockpiles back to more normal levels.
John Kemp; Editing – William Hardy – Reuters