Analysis: U.S. Refining Margins Soar on Gasoline Shortage


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- The 3:2:1 crack spread versus WTI broke the $70 bbl mark in 
intraday trading Thursday (7/17),  the first time it has reached that level on 
record. As U.S. fuels inventories are rapidly shrinking, the spread in late 
June soared eclipsing its Iran-war highs from May and surpassing the previous 
record set in April 2022 during Russia's invasion of Ukraine.

   The divergence between crude oil and oil product futures was partly brought 
upon by the sudden resurgence of crude supply from the Middle East, even as 
global refinery runs were still at multi-year lows.  Over the past four months, 
the largest oil supply disruption in history has eroded crude demand much more 
significantly than consumer's fuel demand. At the same time, fuels supply was 
just as affected as crude supply, and all this came against a backdrop of the 
global crude market tilting into record oversupply at the beginning of the year 
while the refined products balance remained level. The resurgence of Persian 
Gulf exports last month consequently sent crude prices plunging, while product 
futures held on to a significant portion of their war-gains.

   On July 2, when oil prices reached their post-war nadir ahead of the most 
recent re-escalation in fighting between the United States and Iran, 
front-month NYMEX WTI crude futures contract contract closed at $68.69 bbl, up 
2.5% from February 27 close, the last trading day before the start of the 
U.S.-Israeli war on Iran began. ULSD futures in contrast, closed at $3.1822 
gallon, up 19%, and RBOB was up 40% from pre-war levels at $2.9173 gallon.

   Another main driving force behind this uneven price development was the 
unprecedented rate of depletion in U.S. fuel inventories, particularly 
gasoline, which within three months plummeted from a five-year seasonal high to 
a 14-year seasonal low. Nationwide gasoline stockpiles fell to 210.5 million 
bbl last week, the least for this time of year since 2012, down 9.6% 
year-on-year and 8.4% below the five-year average.

   The pace of gasoline inventory draws since early April was three to four 
times faster than is typical for the season and came as a direct result of the 
Strait of Hormuz supply crisis. Refined product exports soared during the 
Strait supply disruption, further tightening inventories, while U.S. refiners 
optimized operations toward maximizing yields of products most affected by the 
crisis, including jet fuel at the expense of gasoline output.

   U.S. refiners have little scope to ramp up crude throughputs given 
utilization is already near maximum capacity. A sustained global supply 
disruption caused by a renewed conflict, just as demand is reaching its 
seasonal peak, will have inventories dwindle fast and give them little room for 
error. All this comes after months of margin-incentivized break-neck pace 
refining, which greatly increases maintenance needs and outage risks. Given the 
recent trajectory of crack spreads, domestic refiners will have no reason to 
slow down -- at least not voluntarily.

    




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