Refinery Margins Squeezed as Gasoline Supply Continues to Build
Summer driving season is well under way. This time of year, also known as "gasoline season," runs from Memorial Day through Labor Day and is associated with declining supply inventories and improving refinery margins.
However, the summer of 2016 actually has seen continued increases in gasoline supply that are well above five-year averages. While more pronounced in the U.S., the trend is consistent worldwide, with three major storage hubs showing markedly higher levels.
As of July, the Northwest Europe and Singapore trading hubs had supply levels that were 4.6 million barrels and 2.8 million barrels above their respective five-year averages, while the New York Harbor trading hub has a current supply that is 14.3 million barrels higher than its five-year average. Overall, the U.S. has a gasoline supply of 241.5 million barrels, up 25.5 million barrels from last year.
These increases in supply levels are primarily a result of refineries raising their gasoline-to-distillate production ratios to take advantage of the record high crack spreads in 2015. This change in refinery output is not easily reversed and has produced a surplus that demand is just not matching, even at this peak time of year.
Demand has been healthy this summer in the U.S., with total vehicle miles traveled in May at 279.4 billion, up 2% from 275.1 billion miles last May. Despite this upward trend, the gasoline supply is continuing to build, which is narrowing profit margins in the industry.
This excess supply will no doubt cause some rebalancing to occur in the market. Two current changes being watched are the early switchover from production of summer blends to winter blends, as well as overall curtailments in production.
Further implications for refinery operations are yet to be seen--whether they will continue to have run cuts, make additional reconfigurations to their product mix, adjust maintenance turnaround schedules, etc. Industrial Info is currently tracking 400-plus active refining projects valued at $50.02 billion in the U.S. and Canada.
As Chris Paschall, VP of Research for Petroleum Refining, notes: "We have not seen the full spin effect yet, as to what operational changes might be coming because of this data. As of now, we are just seeing the reduced margins and some beginning adjustments."
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