The Oil Industry’s Downstream Headache Is Here To Stay

There appears to be simply no end in sight for the current fuel supply crisis, along with summer demand set to spike while refineries run at an unsustainable rate.

Last week, Bloomberg  reported , citing anonymous sources, how the Biden administration was looking at the possibility of restarting idled refineries in order to boost fuel creation and tame prices.   Meanwhile, operating refineries are usually running at utilization prices of over 90 percent, which, according to industry insiders, is an unsustainable rate. Plus come hurricane season, if there is refinery damage, things might get really ugly with the gasoline supply situation.  

Welcome to the downstream nightmare of the power world.

The usa has lost around 1 million bpd in refining capacity since 2020, based on a Reuters  review   that also cited one analyst, Paul Sankey, as saying this particular meant the country is in what exactly is effectively a structural lack of such capacity. Internationally, refining capacity has  shrunk   by over 2 million bpd since 2020.

According to the International Energy Agency, this is not a problem at all. The particular IEA estimated that global refining capacity shed 730, 000 bpd last year and that, this year, refinery runs would be about  1 . 3 or more million bpd   lower globally than what they were in 2019. The reason that would be no problem for the IEA is that demand for essential oil is seen as 1 . 1 mil bpd lower than what it is at 2019.

Not really everyone is so calm, nevertheless , especially in the United States, where retail fuel prices are busting records while refiners  convert   their own refineries to biofuels creation plants.

“ It’s hard to see that refinery utilization can increase a lot, ” Gary Simmons, main commercial officer of Valero, told Reuters. “ We’ve been at this 93% utilization; usually, you can’t sustain it pertaining to long periods of time. ”

Interestingly enough, despite the imbalance in supply and demand, which has pushed the break spreads to the highest within years, refiners do not seem to be planning new capacity enhancements. The reasons: time and investor sentiment.

“ Investors do not want to see companies pouring money into natural oil and gas growth, ” Jerrika Gabelman, director at Cowen, told Marketplace last month. In addition to this, building a new refinery is a lengthy and expensive endeavor that few refiners appear to believe is justified despite the record crack spreads. Also, investors have become a lot more impatient and don’t want to await returns from projects such as new refineries.

At the same time, demand for sophisticated products remains strong: Oughout. S. fuel exports are usually running at record prices, a lot of them going to Europe, which usually, like the U. S., reduced its refining capacity during the last two years but now needs new sources of oil products after it embarked on an emergency course to cut its dependence on Russian oil and fuels.

Speaking of Russian federation, sanctions have resulted in a considerable reduction of refining capability, with Reuters estimating just as much as 30 percent idled, with some 1 ) 2 million bpd within capacity likely to remain offline until the end of the season, according to JP Morgan.

Meanwhile, in Asia and the Middle East, improving capacity has been on the rise. In Asia, the new additions have topped 1 million bpd, according to a Bloomberg  chart , while in the Center East, new refining capability since 2019 has reached about half a million barrels everyday.

The balance associated with refining capacity, then, have not just changed but also shifted geographically. The U. T. two weeks ago exported 6 million bpd in sophisticated petroleum products. After the EUROPEAN UNION approved an embargo on Russian crude and items, albeit “ in principle” for now, chances are that demand meant for imports from the U. T. will rise further, forcing U. S. refiners much more.  

It will be time for hurricane season, and even if the Gulf of mexico Coast gets lucky this year, refinery closures in anticipation of storms making landfall are pretty much guaranteed, based on what we have seen in the past.

This does not bode well for fuel prices, which have become a major issue to get governments on both sides from the Atlantic. There is a certain feeling of irony in that a single, although by no means the only, reason behind the capacity imbalance is investors’ focus shift from coal and oil to alternative energy resources.

The way issues look, refiners could create more refining capacity, but investors are unwilling to participate in the long-term growth of the oil industry, as Marketplace’s Andy Uhler put it. What this translates into is definitely higher fuel prices for longer until demand begins to subside, which would probably happen a few higher price level.

In the immediate expression, however , with driving period soon to be in full golf swing, the refining capacity situation will likely make a lot of lifestyles harder. And while gasoline is in the headlines because of the millions of drivers who have to pay a lot more at the pump, the  bigger problem remains diesel   – the particular fuel that the freight business depends on to bring goods through producers to consumers worldwide.

By Irina Slav for Oilprice. com

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