U.S. Refiners set to cut down output, maintain gasoline prices
U.S. crude oil refiners are expected to reduce their run rates this quarter due to weak gasoline margins and planned plant maintenance. They are aiming for utilization rates in the low-90s after running at higher rates for most of the year.
The shift to producing more distillates and seasonal maintenance has led to a reduction in production. Refiners have been producing gasoline at high rates to meet strong demand for distillates.
Gasoline prices have fallen as demand has weakened, and analysts believe that the reduced production will be sufficient to keep gasoline prices stable. Refineries typically produce two barrels of gasoline and one of diesel for every three barrels of crude oil processed.
According to Matthew Blair, head of refiners, chemicals & renewable fuels research at investment firm Tudor, Pickering, Holt & Co, the recent guidance from refiners regarding softer production levels aligns with seasonal expectations. Gasoline prices have seen a significant decline, with a drop of 37 cents per gallon in the last month, bringing the national average to $3.44 per gallon.
The decline in gasoline demand is evident in the U.S. Energy Information Administration’s (EIA) recent report, which shows a drop from 8.86 million barrels per day (bpd) to 8.7 million bpd. Refiners are adjusting their production in response to these market conditions.
Certain companies are taking varied approaches in response to the current market conditions. Valero Energy, the second-largest refiner in the U.S., plans to maintain high production levels to meet demand for jet fuel and other distillates. Valero’s 14 refineries will operate at utilization rates between 93% and 96.5%, which amounts to a combined crude oil capacity of 2.7 million barrels per day (bpd).
HF Sinclair also aims to increase production slightly compared to the previous quarter, with planned plant turnarounds completed.
On the other hand, Marathon Petroleum, the largest U.S. refiner with 13 domestic plants processing 2.9 million bpd, intends to operate at 90% capacity, down from 94% in the last quarter. Phillips 66, the fourth largest refiner, is planning to operate in the low 90% range, down from 95% in the third quarter. These strategies reflect a range of responses to current market dynamics.
“Ninety to 91% is where they will operate,” said John Auers, managing director of Refined Fuels Analytics. U.S. refiners are emphasizing diesel production, which has higher profit margins, as they emerge from overhauls, Auers said.
Refineries have the flexibility to adjust their production mix between distillates and gasoline, typically shifting around 5% to 10% of their production to respond to market conditions and profitability.
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In August, distillates were fetching about $1.10 per gallon, while gasoline was selling for 80 cents per gallon, according to the U.S. Energy Information Administration (EIA). The higher profit margins for distillates, particularly diesel, have made it a more attractive product for refineries, and many are prioritizing its production.
Andrew Lipow, president of consultancy Lipow Oil Associates notes that “It is the diesel that’s carrying the day,” he expects fourth quarter refinery utilization in “excess of 90%” of capacity.
