Heavy U.S. refinery maintenance is the harbinger of tight product market
Refiners usually undergo annual maintenance during which period their demand for crude oil decreases in tandem with their supply of products. This yearly activity is neatly on display on the chart above. Of course, other factors like unplanned upsets or weather-related disruptions also influence operation, sometimes to the extreme, nonetheless it is the annual overhaul that has a recurring effect on refinery activity and consequently product availability.
This year’s planned outages are expected to be more severe than usual for a good reason. United States refiners postponed their maintenances in the last two years. In 2021, the pandemic hindered them to undertake the repair works whilst last year very attractive margins proved more than tempting to delay shutdowns. Last year the weekly run rates stood at 91.17%, according to EIA data, well over the average of the preceding five years of 87.81%.
The postponement of the overhaul in the last two years means that the cut back in operation will be deeper and will take longer in 2023 than in the past years. Maintenances are typically planned for the first quarter of the year due to subdued demand, however, this year it is expected to last throughout May. Utilization rates have already fallen back to the 85% to 89% range and are forecast to stay there for the next three months. In barrel terms some 1.4 mbpd of processing capacity will be shed during this year’s shutdown, twice as much as the historic norm.
Protracted maintenance naturally leads to supply constraints. This comes at a time when both U.S. gasoline and distillate inventories are below last year’s levels and the 5-year averages. Add to that the EU embargo and the G7 price cap on Russian product sales, which could create extra demand for U.S. products, especially when European inventories start drawing and there is a strong case for another meaningful increase in refining margins. Although CME Group’s 3-2-1 crack spread has cheapened in recent weeks, at around $30/bbl it is still well over the seasonal norm, which should imply a continuously tight U.S. product market for the first half of the year and may be even beyond.
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