Falling margins, rising maintenance
A busy season of refinery turnarounds is about to weaken crude demand, again
Refining margins are weakening, inventories are brimming and, to make things worse, this year's maintenance season looks like it will be especially busy. All things being equal, it means the crude oil glut has some way to go in the first half of the year.
Global refinery runs are already on their way down. They fell by 1.3m barrels a day in January, down to 79.8m b/d, according to the International Energy Agency, buckling under the pressure of lower margins and the onset of seasonal maintenance in the US. In February, runs will likely remain flat, but fall again, by 0.6m b/d, in March, the agency says. Global crude stocks are expected to rise, testing inventory tank tops. In the US, crude stocks at Cushing have already reached about 90% of tank capacity.
The biggest short-term culprit is turnarounds - when a refinery schedules an entire processing unit to be taken offline for maintenance. Energy Aspects, a consultancy, expects 5.2m b/d of global processing capacity to be offline in this way in March. In December, just 3.56m b/d was undergoing maintenance. North America and Asia will each take off almost 1.5m b/d of capacity, while European maintenance will account for another 1.2m b/d. Global turnarounds will then fall in April, to 4.7m b/d, and May (2.8m b/d) before rising again in June, to almost 3.2m b/d.
But things will improve. Refinery runs will rise by 300,000 b/d in Q2, to 78.2m b/d and peak at 79.5m b/d in Q3 - a year-on-year gain of 0.5m b/d. Even in Q4, when seasonal maintenance will start up again, the consultancy expects runs of 78.8m b/d, or 0.8m b/d than in Q4 2015. In the US, margins at Midwest refineries were negative at the beginning of February. This has led to an increase in planned maintenance works. Others may decide to use the dip in margins to rush in their own turnarounds.
BNP Paribas estimates that US cracking margins fell to about $5 a barrel for the week ending 5 February, from $10.20/b seen in Q3 2015. Brent cracking margins fell to just $3/b, down from almost $7/b. Energy Aspects say worse is in store, with the latter expected to come in at $1.50/b this quarter, before rising to $5/b and $5.50/b in the second and third quarters. They could be back down to $1/b by the end of the year, if crude prices rise.
If US refiners respond by taking more capacity offline - beyond the 1.1m to be lost in turnarounds in April - crude will pour into storage again, lifting Cushing's utilisation to a "clearly unsustainable" level of 94%, says Energy Aspects. Some spare capacity is needed for operational purpose.
US commercial stocks sat at 502m barrels in early February. Despite a 0.8m barrel draw a week earlier, that left it "near levels not seen for this time of year in at least the last 80 years", says the Energy Information Administration, a division of the Department of Energy.