In a sign that the gasoline glut is not going away, U.S. refiners are succumbing to poor market conditions, reluctantly moving to cut back on production as they drown in oversupply.
The gasoline glut is the worst in nearly three decades, with stocks rising to their highest level since data collection began in 1990. And as with any market suffering from too much supply, prices have crashed. Refining margins for gasoline are at their lowest level in years due to the overhang, and major refiners are being forced to throttle back on production.
Reuters reports that at least three refineries have reduced output recently. Marathon Petroleum Crop cut gasoline production by 11 percent to 195,000 bpd at its Kentucky refinery and PBF Energy reduced output at two of its refineries, one in Ohio and the other in Louisiana. These are early signs that the refining industry is being forced to cutback as gasoline storage is bursting at its seams.
At the same time, other refineries are undergoing routine post-winter maintenance, retooling for summer fuel blends. The combined outages should help reduce gasoline inventories, which stand at nearly 260 million barrels.
"We've got to really look at these inventories, and shame on us if we fall into the same trap that we did last year," PBF Energy CEO Tom Nimbley told Reuters. In 2016, refiners ramped up gasoline production to extraordinary heights, hoping to take advantage of brisk demand and appetizing margins. But the resulting glut crushed refining margins and led to record high inventory levels – a record that was only eclipsed this month.
A more cautious approach from the refining industry could help pare back inventories, but that still leaves the crude oil market with a mess on its hands. Lower refining runs will equate to lower crude oil purchases, and as a result, potentially higher oil inventories. So, even as gasoline stocks fall, crude oil stocks could rise even more.
The problem, then, is not necessarily with the refiners, but with a mismatch between crude oil supply and demand for its products – the same problem that the market has been dealing with since mid-2014. Overproduction downstream is the knock-on effect from years of too much supply upstream.
So, what about crude oil then? The oil market is “in a holding pattern as they wait for hard data” that demonstrates improvements in demand, Goldman Sachs wrote in a research note. “Markets need to see that the OPEC supply cuts generate real inventory draws and the strong manufacturing survey and Chinese credit data create real activity. In other words, ‘show me the activity’; real demand, real stock draws and empty warehouses,” the investment bank concluded.
On the other hand, Goldman is not concerned about the sudden uptick in U.S. crude inventories, citing broader drawdowns in storage elsewhere in the world. “The U.S. will be the last to draw and global fundamentals suggest a much stronger market than the recent U.S. stock builds would suggest.” Goldman Sachs analysts also downplayed the seemingly terrible gasoline demand figures in the U.S., chalking some of it up to quirks in data measurements from week to week.
There were two other observations from Goldman’s report that are worth noting. The bank was surprised at how quickly U.S. oil production was rebounding, leading to an upward revision of its supply forecast for 2017 by 200,000 bpd. Goldman now expects the U.S. to add 800,000 bpd by the end of the year. However, the second important point to note is the fact that Goldman says this higher output will be fully offset by higher demand.
Putting it all together, Goldman stuck to its forecast for Brent to average $59 per barrel in the second quarter and WTI to average $57.50 – meaning the bank expects price gains in the next few months.
But that all hinges on a turnaround in the inventory data. Both crude oil and refined product stocks have climbed almost every week of 2017 so far, and sometimes by enormous amounts. The second quarter will only see higher oil prices if the supply overhang narrows – and inventories start to fall.
By Nick Cunningham of Oilprice.com
