Relatively low levels of U.S. refinery utilization amid the ongoing maintenance period will likely keep upward pressure on the country's crude stockpiles, which already sit above 500 million barrels, a record high. Cutbacks announced recently by U.S. refiners in response to poor margins should help draw down gasoline and distillate inventories, according to an analysis and preview of U.S. Energy Information Administration (EIA) data prepared Tuesday by Platts, the leading independent provider of information and benchmark prices for the commodities and energy markets.

A reduction is badly needed to help stocks ease from their current bloated levels. Gasoline stocks sit at 255.657 million barrels, a record high, after a seasonal drop in demand combined with an unusually large slowdown in blending activity at the start of the year.

A relatively mild winter has kept distillate demand subdued at a time when heating oil needs are typically at their highest. The glut has been especially visible on the Atlantic Coast, where combined stocks of low- and ultra-low sulfur diesel (ULSD) have reached 54.076 million barrels, a 114% surplus to the five-year average for this time of year.

Analysts surveyed by Platts on Tuesday expect refinery utilization dropped 0.5 percentage point last week to 85.6% of operable capacity. Analysts also expect gasoline stocks fell 1 million barrels last week, while distillate stocks are expected to have fallen 1.8 million barrels.

The U.S. Energy Information Administration is scheduled to release its weekly inventory report Thursday at 1600 GMT.

The prospect of refiners churning out fewer products could help lower stocks, particularly in the Midwest, where refinery utilization has remained above 95% of so far this maintenance season.

With demand failing to keep pace, Midwest gasoline stocks reached 62.851 million barrels the week ended February 5, the highest level since 1993.

Some refiners have now decided that the market environment no longer justifies running at these high levels.

PBF said last week it was cutting FCC and hydrocracker runs at its 160,000 b/d Toledo, Ohio, refinery because of poor refinery economics.

Market sources said last week that Valero had cut gasoline output at its 195,000 b/d Memphis, Tennessee, refinery by as much as 25% due to poor margins.

A Valero spokesman declined to comment on the status of the Memphis plant Tuesday, citing company policy to not comment on operations or possible outages at its facilities.

Midwest refining margins, which had been negative on the back of soaring inventories, strengthened last week, following news of refinery cutbacks.

One question is whether the return of margins to positive territory enticed refiners, which could have offset the impact of an earlier slowdown and perhaps caused inventories to build.

Midwest cracking margins using Bakken averaged $3.72 per barrel (/b) last week, up from minus 45 cents/b the week prior. Margins using crude benchmark WTI averaged $1.54/b last week, compared with minus $2.75/b the week prior.

On the U.S. Atlantic Coast (USAC), a similar story surfaced last week with respect to Delta Air Lines unit Monroe Energy.

Monroe slashed crude runs at its 185,000-b/d Trainer, Pennsylvania, refinery, by 9% due to deteriorating margins, according to a source familiar with refinery operations. A company spokesman was not immediately available for comment.

USAC margins processing Bakken crude averaged 35 cents/b last week, compared with minus 86 cents/b the week prior.

Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.

Apart from a potential drop in refinery utilization, downward pressure on Atlantic Coast refined product stocks could come from fewer imports due to a refinery disruption.

Irving Oil unexpectedly shut the FCC at its 300,000-b/d Saint John, New Brunswick, refinery, trade sources said last week. A company spokeswoman was not immediately available for comment. The refinery is a key supplier of petroleum products to U.S. East Coast markets, supplying about 150,000 b/d of diesel and gasoline.

By Thursday, the refinery was in the process of restarting the FCC and was expected to have the unit back to normal operations within three days, market sources said.

Using a proxy for Irving Oil's Saint John refinery, margins were barely positive last week. Margins at Atlantic Coast refiners that process Canadian Hibernia crude last week averaged $3.31/b and averaged $4.12/b for the quarter to date.

Crude stocks seen rising

A potential drop in refinery utilization would have the opposite impact on crude stocks, putting upward pressure because less activity means less crude is pulled out of storage.

Rising crude stocks have caused the New York Mercantile Exchange (NYMEX) crude contango* to deepen. The spread between front-month and second-month futures reached minus $2.62/b last Thursday, out from minus 88 cents/b at the end of October.

A large contango has lured barrels to the NYMEX crude oil futures contract's delivery point of Cushing, Oklahoma.

The amount of crude in storage at Cushing has risen to 88.6% of working capacity, and 87% of working capacity adjusted to reflect pipeline space and crude in transit, EIA data showed. That was up from 71% of adjusted working capacity at the end of October.

With the amount of available space shrinking, storage has become more expensive, another factor behind the deepening contango. One consequence of a growing contango is that it raises the cost for traders looking to roll forward their long positions in the nearby contract. A trader will have to sell the March contract and buy the more expensive April contract. The NYMEX March contract expires February 22, 2016.

Time spreads are expected to weaken further over the first half of 2016 as the weekly pace of Cushing storage picks up, Barclays said in a research note this week: "The rate of builds in Cushing is likely to increase over the coming weeks due to weak demand indications, and refinery margins are leading to economic run cuts from refineries, adding to an already low run environment given the seasonal maintenance."

The weekly build at Cushing has averaged nearly 160,000 b/d since the start of the year, according to EIA data. Looking out further, in the second half of 2016, an expected decline in US crude production should cause NYMEX crude time spreads to strengthen relative to ICE Brent, Barclays said.
Source: Platts