Refining Margins Squeezed as Tepid Demand Casts Shadow Over U.S. Gasoline Market

• U.S. gasoline demand has been tepid in the early part of the driving season, resulting in rising stocks and lower refining margins.
• Strong refining utilization and increased production have added to the pressure on refining margins.
• The potential for a busy hurricane season in the Gulf Coast could disrupt production and affect gasoline supply later in the summer.

Surging U.S. gasoline production and tepid demand early into the driving season have boosted American gasoline stocks in recent weeks, weighing on refining margins and oil market sentiment.

Weaker gasoline demand compared to last year, a well-supplied market with refineries boosting output after spring maintenance, and the recent slide in oil prices have helped lower U.S. gasoline prices at the start of the summer driving season. This is good news for American consumers and the sitting U.S. president seeking re-election in November. 

However, rising stocks and refinery runs are depressing refining margins, which could prompt U.S. refiners to reduce fuel production soon, especially if gasoline demand remains tepid for most of the summer. 

The biggest wild card for gasoline supply and prices later this summer could be what is expected to be a busier-than-usual hurricane season that could force some U.S. Gulf Coast refineries to shut down operations in case major storms move to the coasts of Texas and Louisiana in August and September. 

Combined, the two refining regions, Texas and Louisiana, account for 48% of total U.S. refinery capacity, while the potential for a stronger hurricane season suggests heightened risk for weather-related production outages in the U.S. oil and natural gas industry, the EIA warned last month. 

Although the path of a single hurricane or major storm is unlikely to affect more than a single cluster of refineries, more than 1.0 million barrels per day (bpd) of capacity could be temporarily taken offline in anticipation of a major storm, the administration said. 

Until a potential shutdown of refineries occurs later this summer, the early summer picture of the U.S. gasoline market suggests that refiners may have overestimated demand. 

Weekly gross inputs into U.S. refineries jumped to 17.511 million bpd in the latest reporting week to June 7, EIA data showed. That’s the highest since 2019, before COVID. 

But with refiners cranking up fuel output amid weaker demand, gasoline stocks have been rising in the U.S. over the past weeks, weighing on refiners’ profits for producing a barrel of gasoline. 

Refinery utilization was at 95% in the week to June 7, compared to 93.7% at this time last year, and the highest seasonal since before COVID. 

If demand was strong, this high rate of U.S. capacity in operation would be warranted. But demand is not strong—it’s weaker than last year. While gasoline demand has been rising since April, it is still trailing last year’s levels by around 150,000 bpd-200,000 bpd. 

As a result, U.S. gasoline stocks have increased in each of the three weeks to June 7 and were at 233.5 million barrels then. This was an inventory build of 2.6 million barrels for the seven days to June 7, with production averaging 10.1 million bpd. To compare, the prior week saw an inventory build of 2.1 million barrels, while production stood at an average 9.5 million bpd. 

If weak demand and rising stocks persist, U.S. refiners could reduce their utilization soon as their refining margins would be further eroded. 

U.S. gasoline cracks were $21 per barrel lower in May, compared to the same month of 2023, and were at their lowest level since May 2021, according to data from Energy Intelligence. 

Signs of improving demand are yet to be seen—for now, it’s lackluster despite falling gasoline prices. 

According to GasBuddy data, U.S. gasoline demand in the week from June 9 to June 15 declined by 1.4% from the prior week and was 1.1% below the four-week average, Patrick De Haan, head of petroleum analysis at GasBuddy, said on Sunday. 

Gasoline prices fell last week, again, due to lackluster gasoline demand and burgeoning supply, AAA said last Thursday. 

“Gasoline demand has trailed 2023 for most of this year, and analysts believe economic uncertainty may suppress demand this summer,” AAA spokesperson Andrew Gross said. 

“So, is the typical robust summer driving season a thing of the past? Or is gas demand just taking longer to pick up steam? We may not know until autumn.”  

By Tsvetana Paraskova for Oilprice.com

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