US refining margin strength to persist into 2004

Nov. 17, 2003
US refiners are enjoying a bull run right now, and the outlook for 2004 is for more of the same.

US refiners are enjoying a bull run right now, and the outlook for 2004 is for more of the same.

Tight products stocks, strong import levels for both crude and products, and robust demand paint a picture of attractive margins. A cold winter and consequent spike in natural gas prices will only improve that view.

Throughput key driver

In fact, says London-based Centre for Global Energy Studies, the current level of US refinery throughput is the key factor driving crude oil prices today. This is because refinery runs dictate inventory changes both directly and indirectly (the latter via imports of crude oil ).

CGES notes that US refinery throughput this year has remained mostly above the average seen for 1998-2002, a trend it expects to continue in the fourth quarter. Earlier in the year, distillate and resid stocks plummeted because temperatures in the US through the first 5 months were 13.2% lower than normal. That spurred refiners to boost runs of these two products while at the same ramping up output of gasoline in time for the summer driving season.

Even with the jump in output, total commercial petroleum stocks remain well below the 5-year average, notes Ohio energy economist James L. Williams, president of WTRG Energy Economics. And that situation could worsen if the Organization of Petroleum Exporting Countries demonstrates cohesion on its Nov. 1 production cut of 900,000 b/d.

Generally low stock cover was reason enough for US refiners to maintain high throughput and high import levels through the summer. Crude forward stock cover was only 19 days' worth at the end of January vs. a previous 5-year average of 21.6 days.

So the market went from a stretch of strong demand for winter fuels into a period of strong gasoline deliveries (again, owing to low stock levels).

By September, CGES points out in its Nov. 4 Global Oil Report, US "refinery runs had eased off by 500,000 b/d since their peak in MayUbut crude oil imports are still running near their record levels of 10 million b/d.

"What happens next depends to a large extent on the pattern of oil product demand during the rest of the year."

Outlook

Inasmuch as refined products output surged mightily earlier this year, the end of the summer driving season typically brings a noteworthy decline in refinery runs. But for the last week of October, refinery inputs were actually up by 87,000 b/d to almost 94%.

And the trend isn't just a sign of more frenzied stockbuilding. According to Williams, citing a "continued sign of an improving economy," the 4 week average for gasoline deliveries in the US was up almost 4% vs. a year ago.

With gasoline demand contraseasonally strong at a time when heating oil stocks are low, the result will be higher utilization rates and higher margins heading into a heating season forecast that now looks to be settled with a coin toss by meteorologists.

And things look even brighter for refining margins in 2004, contends Aaron Brady, senior analyst at Wakefield, Mass.-based Energy Security Analysis Inc.

All signs point toward a continuation of or even an increase in strong refining margins in the US in the coming year, Brady contends. The cause: a worsening gasoline deficit in tandem with tough new fuel specifications.

"Distillation capacity will grow faster in the United States over the next 2 years, but this will not necessarily translate into more gasoline production" Brady said. "Tougher gasoline standards in 2004-06 will hit gasoline production even more."

But rising demand for gasoline will spur greater US imports, which underpins robust margins, ESAI notes.

The situation also bodes well for European refiners, whom Brady sees as benefiting not only from the surging US product demand but also from a deepening middle distillate deficit and the need for increased investment in desulfurization equipment in that region.

Now all US refiners have to worry about is how to fend off the usual hue and cry for investigations when such a precariously balanced system is prone to price spikes with a sudden outage or jump in demand.

(Online Nov. 10, 2003; author's e-mail: [email protected])