Specter of gasoline, diesel glut reverses oil's gains

LONDON (Reuters) - A growing overhang of gasoline and diesel fueled a sharp sell-off in oil futures on Monday that reversed a recent rally over the wildfires in the heart of Canada’s oil sands region, traders and analysts said.

Crude oil storage tanks are seen from above at the Cushing oil hub, in Cushing, Oklahoma, March 24, 2016. Picture taken March 24, 2016. REUTERS/Nick Oxford

The sell-off came amid warnings that supplies could outpace global demand even during the peak summer driving season that traditionally kicks in at the end of May.

While crude oil supplies have significantly tightened in recent weeks due to outages linked to unrest in Libya, militant attacks in Nigeria, the fire in Canada and gradually slowing U.S. shale production, refineries have continued to run at full throttle in anticipation of rising demand.

But refining profit margins, known as cracks, are coming under heavy pressure as storage tanks brim and more plants return from maintenance or outages, such as Exxon Mobil’s Torrance, California 149,500 barrels per day refinery.

“Stocks are quite high, and they’ve got all these refineries coming back in the States,” said Steve Sawyer, head of refining at consultancy Facts Global Energy. “The news that these refineries were coming back put pressure on the cracks.”

Sawyer said some 400,000 to 440,000 bpd of refinery capacity had been offline in April, but was now restarting, pouring more oil products into the market.

Benchmark U.S. gasoline refining margins <1RBc1-CLc1,> fell by as much as 4.3 percent on Monday, sinking by more than 30 percent below their five-year average of $25.22 a barrel. That followed a surprise build in U.S gasoline stocks last week as more tankers laden with the driving fuel head to the New York Harbour pricing hub.

European Low Sulphur Gasoil futures were also down by nearly 5 percent as more tankers headed to the region from Asia, the Middle East, Russia and the United States despite storage levels in the region hitting near maximum.

Brent crude oil, the most closely watched oil futures, were also down by nearly 4 percent.

Refining profits could come under further pressure with the tightening of the crude market, said Robert Campbell, head of oil products research at consultancy Energy Aspects.

“With the crude oil market slowly tightening, we expect refined products cracks to be under gradual pressure since crude sellers will start to regain pricing power over refiners.”

In a further sign of the growing overhang of supplies, Brazil has joined a list of countries exporting diesel to Europe, reversing a traditional route and underscoring a weakening of the largest South American economy.

In the United States, distillates stocks, which include diesel and heating oil, reached their highest seasonally since 2010, the Energy Information Administration said.

Reporting by Ron Bousso and Libby George, editing by David Evans