US refinery rates fall, producers struggle to recover margins

18 November 2009 21:39  [Source: ICIS news]

Oil refineries in Pasadena, TexasBy Steven McGinn

HOUSTON (ICIS news)--US refineries operated at 79.4% of capacity during the week ended 13 November, well below previous levels, as refiners attempt to bolster sagging profit margins by shuttering operations, the US Energy Information Administration (EIA) said on Wednesday.

With domestic total product demand down nearly 1m bbl/day from last year, or about 5%, refiners have consolidated operations and even closed refineries to preserve profit margins.

The gasoline crack spread, or the profitability index when comparing NYMEX gasoline futures prices to the crude contract, dropped to around $2/bbl in late September from around $12/bbl in June.

Gasoline crack spreads have averaged under $4/bbl in the past two months, “not a good margin” for refiners to work with, according to a US Gulf coast gasoline trader.

Heating oil crack spreads have not fared much better than gasoline, as distillate fuel, which includes diesel fuels, have averaged around $5-6/bbl since September.

“I think at least 1m bbl/day of capacity has to disappear,” said an east coast-based refined products trader.

With large product and crude supplies and weak demand, refiners are cutting production levels.

Operational rates at refineries during this time of year have historically been above the 85-90% range, according to the EIA.

However, over the first two weeks of November, refinery rates dropped below 80%, historically unprecedented, according to market analysts.

“That is the first time since 1990, as far back as the DOE [Department of Energy] provides weekly data, rates broke the 80% threshold in the month of November,” energy analyst Stephen Schork wrote in his daily newsletter, The Schork Report.

“More importantly, refiners are planning to maintain production below 80% through the remainder of this quarter,” Schork said.

Recently, Western Refining said in its third-quarter financial results that it will idle its 17,000 bbl/day Bloomfield refinery and consolidate operations into its 23,000 bbl/day Gallup refinery. Both refineries are in New Mexico.

With diesel fuel demand down due to the weak economy, Valero shut its 235,000 bbl/day Aruba refinery, a middle distillate-producing facility.

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By: Steven McGinn
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