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U.S. Refineries Are Running Hot

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

U.S. Refineries Are Running Hot
 
Harry Altham
Energy Analyst, EMEA & Asia

The oil complex has moved higher this morning following bullish DOE data, which showed a 1.02M bbl draw in oil inventories for the week leading up to 20th May – which rises to 6.99M bbl when we add in the draw from the Strategic Petroleum Reserve (SPR). Though there was a 1.66M bbl rise in diesel inventories, the NYM Heating Oil contract had made a full price recovery above $3.83/gallon within three hours of the data release and is now trading at a premium to gasoline, in which inventories fell by 0.5M bbl last week. The tightening of U.S. gasoline inventories has resulted in increasing imports from Europe, whose own inventories fell by 24.5% two weeks ago – in part because of those increased exports. We are expecting ARA region inventory data for last week to be released later today. 

Refinery runs surge to highs not seen since 2019
Part of the problem that U.S. refiners have is a lack of spare capacity; refinery percentage utilisation rose to 93.2% across the United States – the most since 27th December 2019. Gulf Coast refinery input reached 9.36M bbl, its largest quantity since 10th January 2020. The figures not only reflect surging demand for products, but they also demonstrate refineries’ increasing ability to respond to that demand. The tightness in refinery run rates can be seen in the Cushing WTI 3-2-1 crack six month spread, whose backwardation has steepened to $15 for refining three barrels of crude into two barrels of gasoline and one barrel of diesel. As retail prices for gasoline and diesel threaten to rise further, we may start to see a detrimental impact on demand towards the end of the summer due to those cost pressures; we believe demand degradation will significantly reduce the level of backwardation once the peak summer driving season has passed in early September.
image 38646
Source: Bloomberg
could ship-to-ship transfers be the liferaft for ESPO crude?
Far Eastern blends of Russian oil, which just a few weeks ago were unable to leave Russia due to the reluctance of freight companies to take on cargoes, are undergoing ship-to-ship transfers onto supertankers in the East China Sea ahead of arrival in China. Asian refineries imported 2.4M bbd of ESPO crude in 2021, of which 80% went to China. The blend’s chemical properties and the five-day journey times from source to destination make it China’s optimal source for oil to refine into gasoline. It raises hopes that Siberian oil wells, which were feared to be at risk of forced closure due to insufficient demand, may be able to sustain production amidst the sanctions imposed by the European Union. In addition, China’s commitment to purchase Russian oil for its strategic reserves will provide sustained demand for at least a year, itself giving Russia time to find alternative buyers of its Eastern blends. Concerns for prospective output in the region initially grew after the 273,000 bbd Sakhalin 1 facility, run by Exxonmobil, declared force majeure in April after vessel owners said the cargoes were uninsurable following the imposition of restrictions by the European Union on ship owners carrying ‘unnecessary’ Russian goods. That ships are continuing to reach Russian facilities will likely limit the impact of the war on long-term Russian oil output, potentially providing some much-needed supply-side support to the global balance sheet amid wider production struggles among OPEC+ members. 
 
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