LONDON (Reuters) - U.S. refiners are struggling to manage their production and stocks as the economy’s uneven re-opening leaves demand for some refined fuels recovering much faster than others.
Output cuts by OPEC+ and U.S. domestic producers have brought crude inventories under control, but stocks of refined products, especially diesel and other middle distillates, are rising unsustainably.
U.S. consumption of gasoline is recovering much faster than diesel, as stay-at-home orders are lifted but much of the manufacturing, freight and distribution system is still operating at reduced rates.
By focusing on meeting rising demand for gasoline, their most important product by volume and revenue-generation, refiners have left the market awash with diesel, which is now depressing profit margins.
In the week to May 29, refiners boosted crude processing to an average of 13.3 million barrels per day (bpd), up from a recent low of 12.5 million bpd in mid-April (tmsnrt.rs/3dvwo8o).
Gasoline consumption continued to recover steadily, with the volume supplied to the domestic market reaching an estimated 7.5 million bpd last week, up from a low of just 5.1 million bpd in early April.
More than half of the gasoline consumption lost when the country went into lockdown has now returned as stay-at-home orders are lifted and private motoring increases.
But distillate consumption is showing a much softer recovery, with supply last week at just 2.7 million bpd, no higher than during the most intense lockdown in early April.
Gasoline stocks remain high but appear under control, rising by 3 million barrels last week and up just 11 million barrels since the country went into lockdown in late March.
Stocks are around 24 million barrels (10%) higher than year-ago levels and 38 million barrels (17%) above the ten-year seasonal average, which is manageable.
By contrast, distillate stocks surged by almost 10 million barrels last week, the ninth weekly increase in a row, with inventories up by 52 million barrels (43%) since the end of March.
Distillate stocks are now 45 million barrels (35%) higher than at the same point last year and 43 million barrels (33%) higher than the ten-year seasonal average, and are still trending higher.
In the short term, refiners have limited flexibility to switch output between light distillates such as gasoline and middle distillates such as diesel.
Refiners therefore face a choice: they can restrict crude processing to control distillate stocks and deplete gasoline inventories; or continue to lift crude processing to meet gasoline demand and swell distillate stocks further.
With profit margins coming under increasing pressure, refiners are more likely to restrict throughput to bring down excess stocks of distillate.
In turn, restricted refinery demand for crude will in turn keep pressure on OPEC+ and shale producers to extend their output curbs for longer, at least until distillate consumption shows sustained signs of improvement.
(John Kemp is a Reuters market analyst. The views expressed are his own)
Editing by Elaine Hardcastle