Concerns that refiners will begin slowing down were confirmed in quarterly earnings calls last week
Expected drawdowns in US stocks of crude, gasoline and distillates might not be enough to alter the bearish narrative gripping the oil market, with traders focused on weak refining margins undermining the entire complex, according to a Monday preview of the US Energy Information Administration data by S&P Global Platts.
Analysts surveyed by S&P Global Platts are looking for crude stocks to show a decline of 1.9 million barrels for the latest reporting week ended Friday.
If confirmed, inventories would have declined 10 of the last 11 weeks, though the size of last week’s expected draw would fall short of the 2.6 million-barrel draw seen on average from 2011-15 the same time of year.
The inability of crude stocks to decline this summer by more than seasonal averages has inflated the surplus of inventories relative to historical levels.
Crude oil inventories have remained more than 30 per cent above their 5-year averages so far this summer, despite a long streak of weekly declines.
One reason for bloated stocks has been refinery utilization, which has been held back by relatively weak margins reflecting the large quantity of gasoline and distillates sitting in storage.
Analysts expect refinery utilization likely fell by 0.2 percentage points last week to 92.2 per cent of capacity. A year ago, refinery utilization equaled 96.1 per cent of capacity, according to Platts.
Refiners have been operating this summer in an environment of softer margins, particularly with respect to gasoline.
The reformulated blend stock for oxygenate blending crack spread to Intercontinental Exchange Brent oil averaged $11.94/b in July, compared with $22.59/b in July 2015.
The ultra-low sulfur diesel crack spread against Intercontinental Exchange Brent averaged $12.91/b this July versus $14.29/b the same month a year ago.
New York Mercantile Exchange crude oil futures for prompt delivery dropped nearly 15 per cent in July recording its biggest monthly decline in a year. The futures contract fell Monday below $40/b for the first time since April 20.
The strength in the US dollar has also dragged oil prices lower. The US Dollar Index spent July at near 13-year highs. A stronger dollar makes fuel imports more expensive for holders of other currencies.
Concerns that refiners will begin slowing down were confirmed in quarterly earnings calls last week.
Several US refiners, including Alon USA, CVR, Marathon and PBF Energy, announced plans to lower run rates.
In addition, Valero is planning a “large turnaround” at its 335,000 b/d refinery expected to begin in Sept. Motiva was heard to be planning at least 45 days of work at its Port Arthur, Texas refinery, also starting in Sept.
Refinery run cuts, whether due to repairs or weak margins, would hurt crude demand, but also help tighten gasoline stocks.
US gasoline inventories equaled 241.5 million barrels the week ended July 22, which was 26 million barrels above last year at the same time.
Analysts are looking for gasoline stocks to show a drop of 400,000 barrels for the week ended Friday, though a draw of that size will do nothing to reduce the surplus of stocks relative to historical levels.
Compared with the five-year average for the same time of year, gasoline stocks have been at a surplus of above 10% since late March.
The surplus has been particularly acute on the US Atlantic Coast, home to the delivery point for the NYMEX crude futures contract.
For the week ended July 22, US Atlantic Coast stocks exceeded the average from 2011-2015 by nearly 25 per cent.
A large inventory of stocks has widened the level of contango in the front-month to 12th-month RBOB timespread, which could incentivize traders to store even more barrels.
That contango has been wider than 10 cents/gal since the end of June. It averaged nearly 15 cents/gal last week.
Analysts anticipate a 500,000-barrel decline in distillate stocks for the latest reporting week, which would be slightly greater than the 237,000-b/d-decline seen on average for the same time of year from 2011-2015.
US distillate stocks the week ended July 22 were 12.8 per cent above the five-year average.
Exports from the US Gulf Coast provide an additional outlet for supplies, though weak prompt fundamentals in Europe have limited the flow of products shipped east across the Atlantic.
Roughly 750,000 metric tons of distillates, mostly diesel, will likely reach Europe during the first three weeks of August, according to cFlow, S&P Global Platts trade flow software.
In July, a total of 1.42 million metric tons of products made the same journey, which was down from a recent peak of 2.03 million in April.