With U.S. refinery run rates already quite high, the potential for data this week to show further increases appears limited, and this could keep crude stocks building until the arrival of summer demand, according to a Monday preview of U.S. Energy Information Administration (EIA) data by Platts, the leading global provider of energy and commodities information and benchmark price references.
The EIA releases its weekly inventory report Wednesday, and analysts surveyed by Platts on Monday expect the data to show crude stocks to have risen 2.9 million barrels last week.
An inventory increase this time of year would hardly be surprising considering the persistent contango*, but seasonal dynamics also play a part. Over this reporting week during 2011-2015, the average rise in crude oil inventories was 5.2 million barrels.
Still, strong refinery demand may have capped the size of last week’s expected build relative to its five-year average. Analysts expect refinery utilization was unchanged last week, holding onto gains from the week prior when the run rate climbed 2 percentage points to 90.4% of capacity.
Crude runs averaged 16.2 million b/d the week ending March 25, which was 1.267 million b/d above the five-year average for the same reporting period. The big jump in refinery demand seemed to herald the end of the winter maintenance season, a bullish scenario for crude. Crude runs had been below 16 million b/d since mid-January.
Yet, prompt-month New York Mercantile Exchange (NYMEX) crude oil futures barely moved on the news, and since then resumed sliding lower. After touching a three-month high at $41.90/b March 22, prompt NYMEX crude has returned to the $30s, settling Monday at $35.70/b, a month-low.
A dose of skepticism over the ability of U.S. refiners to keep ramping up production this early in the spring could be playing into the market reaction.
Last spring, crude runs topped 16 million b/d for the first time the week ending April 10, but then spent several weeks teetering around that mark.
It wasn’t until May that crude runs broke to the upside and pushed their way above 17 million b/d by late July.
ARE REFINING MARGINS STRONG ENOUGH?
While refining margins on the Gulf Coast and Midwest have been positive, they also don’t look stellar enough to justify boost rates even further.
Cracking margins using West Texas Intermediate (WTI) last week averaged $1.35/b on the U.S. Gulf Coast (USGC) and $4.35/b in the Midwest, Platts data shows. The same margins were even higher last spring, averaging $8.94/b on the Gulf Coast and $10.33/b in the Midwest the week ending April 10, though refiners still held back until closer to summer.
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.
Refiners could also divert barrels toward storage tanks as long as the economics of storage remain profitable. NYMEX crude time spreads have narrowed recently, but still looked wide enough to cover the costs of storage and related expenses.
Economist Philip Verleger, using monthly storage costs at 50 cents/b, calculated the returns to storage for WTI were positive as of April 1. Those returns were positive even when calculating 80% of the crude purchase was financed at 5% interest rate.
The NYMEX crude front-month/second-month spread averaged minus $1.31/b last week, in from a moving 30-day average of minus $1.60/b. For Mars crude, the front-month/second-month spread averaged minus $1.27/b last week, out from a moving 30-day average of minus $1/b.
USGC DISTILLATE EXPORTS UP
An uptick in Gulf Coast exports of distillate to Europe should help lower the region’s inventories as the result of an open arbitrage in late March.
Cargoes carrying 1.38 million metric tons of distillates have loaded on the Gulf Coast for discharge in Europe in April, according to an estimate based on cFlow, Platts trade software.
Analysts expect distillate stocks declined 1 million barrels last week. The EIA five-year average shows a decline of 68,000 barrels during the same reporting period.
Market participants will be keeping an eye on gasoline implied demand**, which has exceeded its year-ago level seven of the last ten reporting periods.
Analysts expect gasoline stocks to have drawn 1.6 million barrels last week, which would mark the seventh straight decline.
Source: Platts