John here. Environmental concerns and tighter regulations reduced investment in refineries. Tight refining capacity then drove the high crack spreads, but they have recently. This long-term strategy to reduce the use of fossil fuels by raising prices is achieving its goal, but at the predictable cost of people using less fuel. Gas stations, largely independent of refiners and the most common point of engagement between consumers and the industry, gain little from this beyond fewer, angrier customers.
By Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. Originally published at OilPrice
WTI crude oil prices fell to their lowest point since early February on Thursday, giving up virtually all gains since Russia invaded Ukraine. WTI crude for September delivery tumbled -1.5% to close at $89.26/bbl while Brent crude for October delivery fell -2.1% to $94.71/bbl. WTI crude has lost ~9.5% over the course of the week, marking the largest one-week percentage decline since April amid growing fears that oil demand will collapse when western nations descend into a full-blown recession.
While oil producers are certainly beginning to feel the heat, it’s refiners like Valero Energy (NYSE: VLO), Marathon Petroleum Corp.(NYSE: MPC), and Phillips 66 (NYSE: PSX) who have been hardest hit by the pullback thanks to a sharp decline in their refining margins aka crack spreads.
For months, refiners have been enjoying historically high refining margins, with the profit from making a barrel of gasoil, the building block of diesel and jet kerosene, hitting a record $68.69 in June at a typical Singapore refinery. The margin later settled in the high 30s a few weeks later, a level still nearly four times higher than the $11.83 at the end of last year, and some 550% above the profit margin at the same time in 2021.
But crack spreads have now gone into full reverse: according to Refinitv data, Asian gasoline margins plunged more than 102% in July to a discount of 14 cents a barrel to Brent crude, a far cry from a premium of $38.05 a barrel they reached in June. Asian refining margins have now crashed to just 88 cents a barrel over Dubai crude, from a record $30.49 in June.
The effect: a sharp rise in inventories from the United States and Singapore to Amsterdam-Rotterdam-Antwerp.
Refiners are being forced to cut gasoline output to minimize losses and switch to producing more profitable fuels.
Indeed, Taiwan’s Formosa Petrochemical Corp. (6505.T), Asia’s top fuel exporter, is planning to reduce operating rates at its residue fluid catalytic cracking (RFCC) units by 5% in the coming weeks, with a Formosa spokesman telling Reuters that the company plans to sell more very low sulphur fuel oil (VLSFO) due to higher margins for those products.
The collapse in oil prices has been so epic and unexpected that some oil pundits are now accusing the Biden administration of fabricating low gas demand data in a bid to hammer oil prices.
To wit, in late June the EIA shut down reporting for several weeks, ostensibly due to a server malfunction. But as ForexLive has pointed out, gasoline demand data has been consistently bad ever since the EIA returned: “Maybe there’s an issue with reporting or maybe it’s a conspiracy“, ForexLive has declared.
Even Wall Street has begun questioning the EIA data.
Bank of America energy strategist Doug Legate has published a note titled the “fall of gasoline demand appears grossly exaggerated.’’
“For the week ending July 22nd, implied gasoline demand rebounded to 9.2 million b/d – a 1 million b/d increase vs the last two week average, and the second highest level of 2022,” BofA wrote in the note to clients. Curiously, the EIA reported a steep drop in gasoline demand shortly thereafter, prompting Piper Sandler global energy strategist to label the data “crooked”, saying the methodology left “significant room for error”.
“We are supposed to believe that in July, in the middle of driving season we are only using 8.6 million barrels per day. That would be down half a million barrels a day from May of this year; that would be below the Covid low of 2020,” Sandler noted. “So we ask all the refiners, we ask all the retailers, we ask everybody that reported earnings this season. Every single one of them tells you that their sales are not down materially from even pre-covid days. Some report record high sales,” he added.
Piper Sandler’s allegations are buttressed by U.S. refining giant Valero. Asked about falling gasoline demand at the company’s earnings call last week, CEO Gary Simmons had this to say:
“I can tell you, through our wholesale channel there is really no indication of any demand destruction… In June, we actually set sales records. We read a lot about demand destruction and mobility data showing in that range of 3% to 5% demand destruction. Again, we’re not seeing it in our system.”
Further, alternate demand data from GasBuddy deviates considerably from EIA’s. GasBuddy tracks retail gasoline demand at the pumps in the U.S. According to GasBuddy, there was a 2% rise in gasoline demand last week, making it the strongest demand of the year. In sharp contrast, the EIA reported a 7.6% drop in demand for the same time period.
The Biden administration certainly is gunning for even lower fuel prices. In an interview with Bloomberg on Tuesday, Amos Hochstein, the White House’s senior adviser for global energy security, said that gas and oil prices need to go even lower while U.S. producers and OPEC+ need to raise output.
But as Adam Button, chief currency analyst at Forexlive, notes, it’s the Biden administration calling the shots now, and “at the end of the day, traders have to trade what’s in front of them”.
“Right now it’s a crude chart that’s breaking support after a major period of consolidation — that’s not good. The calls for a recession are growing louder crude demand has a long history of following global growth. There are supply factors that will eventually be bullish — like the SPR releases ending in October — but that’s months away and OPEC is still adding some barrels,” he said.
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Hi John. Good info, but a little whinge from a non-us reader. Mr. Kimani may have expected to OilPrice readers to know what EIA stands for, but I had to go a-hunting. Edmonton International Airport? no… Manitoba Employment and Income Assistance? probably not… Do I want 50% of coupons? definitely not… US Energy Information Administration? that seems right. Now, more coffee and back to the article.
Yeah, probably the Energy Information Administration.
We have regularly referred to the EIA without unpacking what the acronym is. Your comment comes off as beating up on a new writer. This is a cross post and McGregor. can’t edit the original author’s text. You need to complain to Kimani, not McGregor.
traffic in my neck of the woods feels worse than pre-Covid.
and if I recall correctly, public transit ridership still is down markedly across the country. doubt work from home is responsible for all of that drop.
miles driven hit a record last year and prob will hit another record this year,
https://fred.stlouisfed.org/series/trfvolusm227nfwa
IMO, Covid caused a secular shift to cars…..particularly given the movement of so many to more suburban Sun Belt states from denser areas
Really hope someone in the know can comment. I have been wondering how can it be that demand is low when folks in Europe try to get their power needs fulfilled without using gas. Workarounds appear to be either oil or electricity, If the numbers have been massaged, we will only learn about that when quite unexpectedly, the pumps run dry. If price is not reflecting value, we are going to have some choppy waters ahead.
Oil and gas are not really interchangeable, at least not in the European context. There are very few bunker fuel electric power stations left in Europe and the number of vehicles using LNG or LPG is negligible. Distillates (light fractions of oil) are used sometimes for ‘peaking’ electric power, but this isn’t really a replacement for natural gas powered stations.
So despite their prices being connected, there is very little interaction in terms of supply and demand.
real time oil consumption numbers are basically non-existent. The most accurate numbers come when oil producers demand for their product starts lagging, which depending on the situation could be months from when demand starts slipping.
That you have various numbers oil traders use to move their markets, well place your bets.
I’m skeptical that gross incompetence at EIA (if that’s what’s happening) is relevant to price drops. A decline in Ukraine hysteria seems a more likely cause.
I think the hubbub about where demand actually is obfuscates the core point: how come gasoline and diesel (both!) went up so much last year?
The article starts off saying the price rises happened because refiners jacked up margins to astronomical levels.
Then the article throws a great big red herring on the table, and says “Bad EIA! They gave us inaccurate demand numbers!”.
The real story is that refiners jacked up prices, and did so a time when demand wasn’t high enough to cause throughput bottlenecks.
Do you object to that last statement?
OK, how come they can make plenty gas and diesel today, with the exact same production investment, but somehow couldn’t make it happen last year? Are you going to argue “covid labor disruption”? Fine, let’s see the staffing numbers. Prove it.
I just did a search on “covid refinery labor shortage”. Nada.
Price gauging. Your oil ‘n gas industry oligarchs, serving the public.
Since the refiners are having such a tough time running their businesses, let’s help out by buying electric cars.
You may think I’m being a smart-aleck, but there’s a lot of reality in that statement. One of the things I do read re: refinery capacity is that owners of the facilities are reluctant to invest in additional capacity, since they expect lower future demand for gasoline.
OK, since that’s the case, the best way we, the public, can help out is to make their projections of lower demand come true.
Work from home. Buy an electric car. Whatever works for you.
Refiners did not “jack up prices”. There really is scarce refining capacity and refiners are also tuned to specific mixes of oil inputs. As we have explained repeatedly, oil is not fungible. Our light sweet crude is not the same as Russian Urals crude, which is more midweight, or Venezuelan heavy sour crude. You need some heavier weight crude to produce diesel. The lack of enough heavy distillates is one of the reasons Biden went begging to Venezuela.
So the loss/de facto embargo of Russian crude imposed costs over and beyond the rise of crude prices by forcing downtime and other costs on refiners to deal with changed inputs.
Seems right, and a bad mix. Demand jumps right when there’s a de facto embargo. But what about speculators counting on another humdinger variant?
i concur with Yves here but i’d add one more note: refiners have no control over the prices they receive for their products; those price are all set by traders at NYMEX in New York, where the daily electronic exchange of petroleum products often exceeds the physical exchange by a hundredfold…
Biden tweeted that he had ordered gas stations to get gas prices lower and they collapsed. it is probably not a coincidence.
it appears the author does not even know how those EIA “demand” figures are arrived at… they’re “product supplied”, from refineries to wholesale distributors, not what most would consider demand at the pump; however, the EIA & the media turned that weekly figure into a proxy for demand…
so, what you’re seeing in those July figures is the wholesalers who overstocked going into the 4th of July weekend drawing down their inventories to a more normal level..