US oil refiners are starting to make progress towards eliminating excess stocks of middle distillates by restraining crude processing and switching equipment to maximise gasoline production.
US distillate fuel oil inventories stood at 176 million barrels at the end of last week, which was 37 million barrels or 21% above the five-year seasonal average ("Weekly petroleum status report", EIA, Sept. 23).
In absolute terms, stocks are unchanged from early June, when they were also 176 million barrels. But the surplus over the five-year average has shrunk from 42 million barrels, or 29%.
Refiners have stabilised bloated distillate stocks over the summer and into early autumn, a time when they would normally be rising, accumulated as a by-product of driving-season gasoline production plans.
Refinery processes and equipment have been reconfigured to maximise production of gasoline and minimise output of mid-distillates such as fuel oil and jet kerosene.
Last week, refiners produced 1.77 times as much gasoline as distillate fuel oil and jet fuel combined, one of the highest gasoline ratios for a quarter of a century (https://tmsnrt.rs/32Y8eAu).
Gasoline-distillate ratios have only approached similar levels a few times, including 2010, 2005 and 1998, when distillate stocks were also far above normal.
Even more importantly, refiners have trimmed total crude processing to reduce the production and supply of all fuels (in effect cutting everything to bring distillate stocks under control).
US refiners held crude processing 16% below the five-year average last week and by the same proportion over the last four weeks as a whole.
By comparison, the total volume of petroleum products supplied to the domestic market, a proxy for actual consumption, was 10% below the five-year average last week and 13% below average for the last four weeks.
The result is that distillate production has been reduced in line with consumption, while gasoline has been under-supplied for months, leading to a sustained drawdown in stocks.
Gasoline stocks have fallen by 36 million barrels since late April, when they were 12% above the five-year average, and are now less than 1% above average.
Refiners are likely to continue restraining crude processing for the next 2-3 months, which will cut distillate stocks close to the average by the end of the year, but leave gasoline stocks well below normal seasonal levels.
Refinery restraint will continue to hold down crude prices in the short term, but should gradually improve refining margins for distillates and especially for gasoline by the end of 2020.
Once excess distillates have been absorbed, the ramp up in refinery activity to more normal levels should produce a rapid acceleration in crude processing in early 2021 – provided the epidemic remains under control and the economy does not relapse into a deeper recession.