Some of the largest oil refineries in the United States are cutting operations this quarter, heightening concerns that there could be a global oversupply of crude oil.
Marathon Petroleum Corp. – owner of the largest refinery in the U.S. – plans to operate its 13 plants at an average of 90% of capacity this quarter, the lowest for this period since 2020. Likewise, PBF Energy Inc. announced it is preparing to process the smallest amount of crude oil in three years, Phillips 66 will operate its refineries near a two-year low and Valero Energy Corp. expects to cut oil processing.
Together, these four refineries account for about 40 percent of America’s gasoline and diesel production capacity.
The U.S. fuel complex – a key factor in the global balance of supply and demand – is faltering as consumption stagnates and profit margins shrink. The slowdown is heightening the possibility of a looming oversupply of crude, a threat that has limited oil prices to a rise of about 7% this year despite OPEC+ production cuts and rising geopolitical tensions. The trend also runs counter to the International Energy Agency’s estimate that global fuel producers will process nearly 900,000 barrels a day more this year.
“The low refining margins are setting the stage for another round of major refinery maintenance in the U.S. this fall,” said Vikas Dwivedi, global oil and gas strategist at Macquarie, in an interview in Houston. “This will weigh on balance sheets and could lead to crude oil restocking in the U.S. for the rest of the year.”
Margins for converting crude oil into fuels are declining due to timing discrepancies in refinery closures, retooling and capacity expansion. At the same time, electric vehicles and heavy trucks powered by liquefied natural gas are becoming increasingly popular in China, the world’s largest oil importer.
At the same time, global crude inventories are expected to rise through the end of the year, even as new refineries ramp up production. The US has been able to ship some of its surplus to Nigeria’s Dangote refinery – which feasts on oil from the Permian formation – and Mexico’s Dos Bocas refinery is set to start production later this year. Overall, global net capacity is expected to increase by about 4.9 million barrels per day between 2023 and 2030, roughly the same as what India currently processes, according to Bloomberg NEF.
But that relief is likely to be short-lived as Guyana increases production while the Organization of Petroleum Exporting Countries and its allies plan to resume daily production of about 540,000 barrels in the fourth quarter.
While the plan is subject to change, those barrels are expected to hit the market as soon as shale producers resume production from wells drilled earlier this year. The U.S. is expected to end the year with a record 13.8 million barrels per day, about 600,000 barrels more than the same period last year, Dwivedi said.
The possibility that supply exceeds demand reduces the premium that geopolitical risks have exerted on crude oil prices, he said.
“The market is no longer willing to pay a huge premium for this because the tensions have not led to a loss of barrels so far,” says Dwivedi, who expects the price of the benchmark Brent crude to average $75 a barrel in the fourth quarter and fall to $64 in the second quarter.
Phillips 66, the largest U.S. fuel producer by market value, cited those weaker margins as the reason for its reduced production forecasts. The Houston-based company is planning preventative maintenance because refining margins are “weaker than they have been in some time,” Chief Financial Officer Kevin Mitchell said during the company’s second-quarter earnings call.
Marathon will “operate at 90 percent commercial capacity” this quarter, said Chief Commercial Officer Rick Hessling, a multi-year low for the period. The company also said the Chinese economy remains a concern and the return of OPEC barrels could cause short-term volatility.
