Some of the top U.S. refiners are slowing operations at their facilities this quarter, fueling concerns about a global crude glut.

Marathon Petroleum, the largest U.S. refinery owner, plans to keep its 13 plants running at an average rate of about 90% this quarter, the lowest level for that period since 2020. Similarly, PBF Energy announced it would process the least crude in three years, Phillips 66’s refinery will run at a near two-year low, and Valero Energy expects to cut refining runs.

Together, the four refineries account for about 40% of U.S. gasoline and diesel production capacity.

U.S. refiners estimate they will reduce output

The U.S. fuel production system, a key factor in the global supply-demand balance, is reeling from stagnant consumption and shrinking profit margins.

Phillips 66, the largest U.S. fuel producer by market value, cited lower profit margins as a reason to reduce its production outlook. Kevin Mitchell, chief financial officer of the Houston-based company, said on the company’s second-quarter earnings call that it plans to conduct preventive maintenance because refining margins are “weaker than we’ve seen in some time.”

Rick Hessling, Marathon’s chief commercial officer, said it was operating “at 90% capacity” this quarter, a multi-year low for the same period. The company also said the Chinese economy remains a concern and the resumption of OPEC+ crude production could bring some volatility in the short term.

Slowing U.S. fuel production raises the prospect of an imminent crude glut, a threat that has limited oil price gains to about 7% this year despite OPEC+ output cuts and rising geopolitical tensions.

The trend also runs counter to estimates by the International Energy Agency (IEA), which expects global fuel producers to process nearly 900,000 barrels per day (bpd) more crude this year.

“The compression in refining margins is paving the way for another round of large-scale refinery maintenance in the U.S. in the fall,” Vikas Dwivedi, global oil and gas strategist at Macquarie, said in an interview in Houston. “This will weigh on the supply-demand balance in the oil market and could lead to a build in U.S. crude inventories for the rest of the year.”

Profit margins from converting crude into fuels are shrinking due to mismatched timing of refinery closures, revamps and new capacity additions, and as electric vehicles and heavy trucks powered by liquefied natural gas become increasingly popular in China, the world’s largest oil importer.

Meanwhile, global crude supplies are expected to increase by the end of the year even as new refineries come online.

The United States has managed to ship some of its excess crude to Nigeria’s Dangote mega refinery, which has been consuming crude from the Permian formation, while Mexico’s Dos Bocas refinery is scheduled to start production this year.

All told, the world is expected to add about 4.9 million barrels a day of net fuel capacity between 2023 and 2030, roughly equivalent to what India processes currently, according to Bloomberg NEF.

But the relief could be short-lived as Guyana increases crude output and OPEC and its allies plan to restore about 540,000 barrels per day of production in the fourth quarter.

While plans could change, additional supply will hit the market as shale producers pump crude from wells drilled earlier this year.

Dwivedi said U.S. production is expected to hit a record 13.8 million barrels per day this year, about 600,000 barrels per day more than a year ago. Supply is likely to outstrip demand, which would reduce the premium that geopolitical risk adds to crude prices, he said.

“The market is no longer willing to pay a huge premium as the tensions have not led to production cuts so far,” said Dwivedi, who expects benchmark Brent crude to average $75 a barrel in the fourth quarter.

Article forwarded from: Jinshi Data