A general view of Tesoro’s Los Angeles oil refinery in California. Global refining has surged so much - it rose the most since 2010 in the fourth quarter - that it risks creating a glut of fuel products that prompts operators to scale back their purchases of crude, according to firms including Morgan Stanley and Wood Mackenzie.

Bloomberg
London
As crude prices stabilised in recent weeks following their collapse last year, one of the key reasons analysts pointed to was bargain hunting by oil refiners.
Don’t expect it to last.
Global refining has surged so much - it rose the most since 2010 in the fourth quarter - that it risks creating a glut of fuel products that prompts operators to scale back their purchases of crude, according to firms including Morgan Stanley and Wood Mackenzie Ltd. That, in turn, could start pushing oil prices back down, they say.
“Refiners may run very hard over the next few months, which is supportive for crude-oil balances near term, but they could flood product markets again,” Adam Longson, an analyst at Morgan Stanley in New York, said by phone on Tuesday.
Brent futures have rebounded 17% to $54.67 a barrel on the London-based ICE Futures Europe exchange from the five-year low reached on January 13. While there are signs of stronger fuel use from consumers, much of the improvement in demand has been driven by opportunistic buying by refiners and purchases to put crude in storage, according to the International Energy Agency, a Paris-based policy adviser to 29 nations
Idled refining capacity is at 2.98mn bpd, the lowest for the time of year since at least 2009, according to data compiled by Bloomberg. Processing totalled 78.3mn bpd worldwide last quarter, a gain of more than 2mn from a year earlier, according to the IEA. Half of the increase was in Europe.
The profit from producing gasoline in northwest Europe climbed to as high as $14.48 a barrel on Thursday, the most in almost a year, according to data from PVM Oil Associates.
European refiners have shut about 15 plants since 2008, according to the IEA, the biggest wave of closures since the 1980s, as recession curbed fuel demand and more efficient plants opened in Asia and the Middle East.
Profit strengthened in the fourth quarter and early 2015, Italian oil refiner Saras said when it reported earnings on February 24. Higher refining margins in most regions supported Royal Dutch Shell’s earnings in 2014, the company said on January 29. Fourth-quarter processing earnings at Repsol improved by a third from a year earlier to $5.50 a barrel, Spain’s largest oil company said on February 26.
“Refiners in Europe are running hard and they’re making too much product,” Jonathan Leitch, a London-based research director at Wood Mackenzie said by phone March 9. The region will refine about 11.4mn barrels of crude a day this quarter, about 260,000 a day more than a year earlier, and “eventually this will produce a glut.”
There could be a repeat of 2014, when refiners encouraged by booming earnings operated at maximum rates in the second quarter and “flooded the market,” Morgan Stanley’s Longson said. Brent tumbled 16% in the following three months.
Total inventories of crude and refined products in the 34 industrialised nations in the Organisation of Economic Cooperation and Development may approach a record of 2.83bn barrels by the middle of the year, according to the IEA. OECD members were storing 2.7bn barrels of crude and fuel in January.
Refiners’ appetite for cheaper crude probably won’t be met with a commensurate increase in consumer demand, Gareth Lewis-Davies, an analyst at BNP Paribas, said by e-mail. The immediate demand impact of lower prices is minimal because people don’t rush to buy larger cars or drive more, he said.
The IEA lowered estimates for global oil demand growth this year to 1mn bpd, down from a projection of 1.4mn in July, saying lower crude prices are curbing economic expansion in exporting nations such as Russia and Venezuela.
Many oil companies are doubtful the current boom will last. BP anticipates a “weaker refining environment” this year while Total is cutting refining and petrochemicals capacity in Europe by a fifth.
The rebound in crude prices that refiners helped trigger could also be what halts the industry pickup, according to London-based Energy Aspects Ltd.
“Record-high refinery runs have helped absorb a significant part of the crude glut,” Amrita Sen, chief oil analyst at Energy Aspects, said by e-mail on March 10. “But a lot of this demand will disappear when prices rise again.”


Related Story