Oil demand boosted as global refinery capacity to reach record

Source: BY HENNING GLOYSTEIN, Reuters • Posted: Monday, June 13, 2016

Oil demand is set to surge in the short-term as refining capacity hits a record, yet the gains may not hold as a flood of fuel gluts the market, eroding profit margins and eventually forcing refiners to cut runs and crude orders.

Data on Thomson Reuters Eikon shows that available global capacity to refine oil into fuels like gasoline, diesel, or jet and shipping fuel, will reach 101.8 million barrels per day (bpd) in August, the highest on record, and up from about 97.25 million bpd in March.

Of this capacity, at least 80 million to 85 million bpd will be utilised over the upcoming northern hemisphere summer months, several refiners and oil traders estimated, triggering strong demand for crude oil as a feedstock, pushing up prices.

“A lot of (crude oil) buying for that (refining demand) is in the process of being done right now. It is a seasonally bullish sign,” said Virendra Chauhan of consultancy Energy Aspects.

The refining surge is occurring just as supply disruptions – including Canadian wildfires, Nigerian sabotage, and output cuts in the United States, Venezuela, and Asia – tighten crude supplies.

With disruptions amounting to 2.5 million bpd, global crude output is likely below 95 million bpd, and producers will be taxed to meet refining demand because of competing purchases for stockpiling, such as China’s and India’s strategic petroleum reserves.

Yet the refinery surge may not sustain itself as the reserve capacity, the difference between available and installed capacity, is about to fall below half a million bpd, the tightest since late 2013, the data shows.

Also, as refiners process more crude into fuels than consumers can absorb, they will eventually have to cut output, reducing demand for oil and leading to lower prices.

“Until new refineries are built, refining activity and, by extension refinery crude demand can basically only go down as facilities either go into unplanned outage or refinery runs are cut to reduce an emerging product glut,” said a senior oil trader in Singapore.

There are also ongoing economic worries, especially in Asia, where most oil demand growth has occurred over the past years.

“China’s economic engine… has begun to sputter,” said Frederic Neumann, HSBC’s co-head of Asian economics research in a note on Friday. “For the global economy that represents a problem.”

Still, the overall installed capacity of 102.25 million bpd will present a new base layer of demand for crude that should help support oil prices in the long-term.

While these developments are significant for oil producers and fuel refiners, consumers are unlikely to notice much of this at the pump since refiners will wind up eating most of the cost as their profits are squeezed by a product glut and the price of crude.

(Reporting by Henning Gloystein; Editing by Christian Schmollinger)