The EIA took up the refining glut in This Week in Petroleum, 6/18/08

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Low Refinery Utilization and High Prices?

Refinery utilization was lower than typical in first quarter 2008. Actual first-quarter 2008 utilization averaged 84.7 percent, compared to the average of 89.1 percent during first quarter 2001 through 2005 (years where first quarter volumes were not significantly impacted by hurricanes). In April and May, utilization remained low, averaging 86.1 compared to an average of 94.1 for the two months during 2001-2005. While petroleum product prices are continuing to break new records, why is refining capacity utilization low? And would increasing refinery utilization reduce those prices?

Refinery outages seem to be running at relatively normal levels in 2008, implying that discretionary cutbacks represented a 4- to 5-percentage-point reduction in utilization during the first quarter, and about an 8-percentage-point reduction in April and May.

Market conditions and product yields provide insight into this question. Utilization is not the only means refineries have of changing product volumes. Refiners typically adjust their output of a product either by adjusting the inputs to the refinery, which affects the output of all products, or by adjusting the yield or fraction of a product produced from a barrel of crude oil. While yields cannot be changed much in the short term since they are a function of refinery equipment, small yield shifts among products can still produce a significant swing in volumes. For example, if refinery inputs are at 15.4 million barrels per day (mainly crude oil), a one-percent change in yield is a 154,000 barrel-per-day change in product volume. Both input changes (which affect refinery utilization) and yield changes have been exercised by refiners in 2008 to meet the market conditions.

Market conditions are the driver behind the discretionary cutbacks in crude inputs. Gasoline prices have risen in 2008 mainly from increases in crude oil prices. Refiners purchase that crude oil and sell product at wholesale prices. The wholesale gasoline price spread (the difference between spot gasoline and crude oil price), where refiners operate, has narrowed, indicating plenty of gasoline supply has been available to meet demand. Supply was outpacing demand in January and February, and inventories built substantially (Figure 1), resulting in very high stock levels and very low wholesale (e.g., spot) gasoline price spreads. Indeed, at some points in March 2008, the gasoline wholesale price was actually cheaper than crude oil. In addition, refiners have been blending more ethanol into gasoline, further reducing the need for gasoline from crude oil. As summer demand has been picking up, inventories have been drawn down from their very high levels at the beginning of March, but gasoline spreads have not increased much. If U.S. refinery utilization increased, gasoline prices might decrease some, but probably not by much, since wholesale gasoline spreads are already low, and crude prices remain high.


They call me Mister Bubble.