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Data released by the EIA today shows that US refinery operating rates decreased for the third week in a row. Refiners are only using 82.1 % of operable capacity, a very low rate in the history of US refining and a reflection of very soft demand.
Meanwhile, refiners have filled crude oil tanks to high levels. Crude oil inventories . At a total of 353.3 million barrels, inventories are the highest since the peak in June 2007 and are above the highest point of the average range recorded by the EIA. St a total of 34.5 million barrels, stocks of Cushing Oil continue to build in PADD II. In addition, the government has been adding crude oil to the Strategic Petroleum Reserves (SPR). Since there were no imports to the SPR, the filling rate is either a result of continued fill policy through contract (oil instead of royalties) or replacement of oil that may have been provided to refiners after the gulf coast hurricane. If it is royalty oil under the Bush administration plan, the purchases may explain the recent rise in oil prices. (See previous writings in this blog for details.)
Gasoline inventories are normal, Gasoline Inventories with some available capacity. However, distillate inventories are extremely high,Distillate Inventories which puts pressure on the refiners to alter normal refining patterns. Although refiners are trying to hold operating rates above 80%, it is unlikely they can continue much longer if demand for gasoline and distillate continue to decrease. We know demand is decreasing because product inventories are increasing despite reductions in imports and reduction in refining rates.
Refiners will optimize production rates to make the best of a bad situation and will begin to upgrade distillate to gasoline so they can utilize remaining gasoline storage capacity. When those tanks fill up, refinery operating rates will have to decrease.
In the 1980's when demand dropped, the US refining industry was able to accommodate the decrease by shutting down small refineries. In fact, over a period of about 10 years, as significant amount of capacity was shut down permanently. Then, as demand returned, capacity was added to the big refineries. The question now, is whether or not the big refineries can may incremental decreases in feed rates as demand pushes the industry below 80%. It could be that at some point a major refinery would have to shut down, allowing the other refineries to increase their rates. This situation could happen because refineries are designed to operated 24/7 at specific pumping rates (within a range). Below the design minimum, the entire refinery has to shut down. While a shut down of a refinery in itself will not impact the supply of product -- it will impact the owners of the refinery that goes down. Keep a close eye on independent refineries. They are particularly vulnerable to this type of scenario.
Generally, data indicate continued slump in demand and no justification for increases in crude oil prices recently or in the near future. It seems almost miraculous that prices are holding in the $40+ range, especially since there are confirmed tankers full of crude oil still available for sale on the international market. Sustaining crude oil prices above $45 per barrel is especially important to support alternative energy projects. The last time we found ourselves in this situation, over a period of just 5 years, the US implemented conservation measures and moved toward alternative energy enough to depress demand by as much as 14%. Unfortunately, the drop in demand triggered a concurrent drop in crude oil prices, which languished for years in the $18-$30 range. On the bright side, it seems that once crude oil prices hold for more than 2 years above a certain price, a new base is established. If past experience holds on this point, we may at least have a new base around $40. Oil price history
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