Refinery Restraint Paying Dividends

Draw on US middle distillate stocks hints at support for a recovery

The middle distillate glut is the biggest obstacle to the recovery of refining margins and crude demand. That glut and weak middle distillate spreads have weakened refining margins, undermining crude demand and crude prices. From the perspective of burning through excess middle distillate stocks, however, some key weekly data points offer up evidence that refiner restraint is beginning to work.

Throughput in key diesel-exporting refining sectors has weakened, according to preliminary data. The charts show US and Russian throughput with the latest available final monthly figures and preliminary figures through October 2020 based on weekly data available as of this writing. Weekly data are an imperfect but useful indicator of refining activity. According to the weeklies, monthly US refinery throughput fell from a post-pandemic peak of 14.5 million b/d in August to 13.4 million b/d in September. Hurricane activity in early September contributed to the 1.1 million b/d month-on-month decrease. In early October, refiners have held runs at September levels and more than 2 million barrels less than in October 2019.

Russian refiners, which typically export 800,000 b/d of diesel, made deep cuts in early October. The chart on the right shows Russian throughput. Entering the turnaround season, runs were already 700,000 b/d (10 percent) below normal levels, so one could wonder whether there would be any further cuts. Our analysis of weekly fuel output reveals a sharp downturn in processing rates in late September and early October.

Russian throughput may fall lower than in May and June, when under phase 1 OPEC+ quotas oil companies had a strong incentive to divert crude from refineries to export markets in a bid to defend market share. Under phase 2 quotas, this consideration is still relevant to decisions about refinery utilization rates, and could affect throughput in Saudi Arabia, another diesel-exporting market subject to production quotas.

Throughput cuts have weakened crude fundamentals and price support, but there is a silver lining for the broader market recovery. In what may be a turning point for middle distillate, US middle distillate stocks saw their biggest weekly draw in years, according to the latest EIA weekly data. For more than four months, combined US inventories of gasoil and jet fuel exceeded 210 million barrels. The week of October 9th, however, those stocks fell by 9 million barrels, the biggest weekly decrease in years, and ended the week at a four-month low of 203 million barrels. Thus, there appears to be some fundamental momentum behind the recent improvement in middle distillate spreads to crude. The early-October throughput cuts and decreases in US middle distillate stocks may represent a turning point for the recovery of refining margins.

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