Refinery Margins Squeezed as Gasoline Supply Continues to Build

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Written by Andrea Moede for Industrial Info Resources (Sugar Land, Texas)--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.

In June, the RBOB-Brent crack spread for the U.S. came in at 37 cents per gallon, which is down 18 cents per gallon from last year, and just below the five-year average. Northwest Europe had a spread of 26 cents per gallon (the lowest since 2014), and Singapore's was 22 cents per gallon (the lowest since 2012).

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.

Because of evaporation from the heat during the summer, different gasoline formulations are required during this season. These summer blends are more expensive to produce, and as inventories are running high, some refineries have already made the change to producing winter blends earlier. Normally these winter blends would not begin production until later in August for sale on September 15, the start date allowed by government environmental regulations.

Expected curtailing of production also has begun. Valero Energy Corporation (NYSE:VLO) (San Antonio, Texas) announced in its second-quarter earnings call on July 26 that it would be making some run cuts in the third and fourth quarters of this year, but that it was too early to say where those would take place. Phillips 66 (NYSE:PSX) (Houston, Texas) also has recently announced that its refineries will be running at mid-90% capacity in the third quarter, as compared to 100% utilization in the second quarter.

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 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."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.