Export window closes for U.S. oil refiners
U.S. oil refiners have relied heavily on exporting surplus gasoline and especially distillates to help offset plunging domestic demand over the last eighteen months.
Record product exports have averted a much deeper crisis within the industry, an even bigger collapse in gross margins and a huge inventory build.
But as the spreading slowdown cuts demand in key export markets across Europe, Asia and Latin America, the export window is set to close. Refiners look set to respond with unseasonal run cuts over the next two months to prevent a massive stock build before spring.
The total volume of gasoline supplied to the U.S. domestic market has fallen 80 million barrels (3.1 percent) from 2.539 billion barrels in January-September 2007 to 2.459 billion barrels in January-September 2008.
Distillate supplied has fallen 70 million barrels (6.1 percent) from 1.148 billion barrels in 2007 to 1.079 billion in 2008.
Refiners have responded with deep run cuts, supplemented with process adjustments to increase the yield to distillates, and heavy exporting to try to limit the build up of unwanted stocks and provide support for pressured margins.
Distillate exports have risen by 94 million barrels in the first nine months of the year to a record 146 million barrels (+181 percent). Gasoline exports are up by a more modest 12 million barrels to 50 million barrels (+32 percent) (see https://customers.reuters.com/d/graphics/US_GSDSEX1208.gif).
Strong overseas demand for motor diesel as well as heating oils for on-grid generation and back-up power generators during H1 2008 provided a useful and generally profitable way of disposing of excess diesel production. Diesel exports have offset all the decline in domestic demand and even provided a useful fillip to total marketable output.
Overseas demand for gasoline has been weaker, limiting product placement.
Contrasting international demand explains why U.S. gasoline margins have collapsed this year while diesel margins, though under pressure, have stayed positive.
Without profitable diesel exports, U.S. refiners would have had to cut throughput much more severely during the summer months.
Overseas diesel markets have provided a crucial source of support for the U.S. refining industry this year. Diesel sales (including record exports) have cross-subsidized loss-making gasoline production.
But as overseas diesel demand falls, that prop is being taken away.
Gasoline inventories have already begun their normal year-end build (refiners produce excess gasoline as a by-product of winter heating-oil runs). Gasoline stocks normally draw down during the February-April maintenance season. But this year the gasoline build has started earlier and is occurring more aggressively than normal.
Refiners are under pressure to react with early run cuts, or start the maintenance season earlier and take more capacity offline for longer after the turn of the year.
In either event, refinery demand for crude oil looks to soften even more than usual as the northern heating season ends. Prospective run cuts heighten the risk of a very large build up in crude oil inventories in Q2 2009, adding to the downside price risks in the near term.