In spite of record summer gasoline demand being well above the previous all-time record set in 2007, refining margins took a nose dive in the second quarter of 2016. However, refined product supply growth has been even stronger than demand, resulting in global record setting inventory builds. In an analysis, “Cruel Summer?” Refining Margins Stumble despite Record Gasoline Demand,” by Ryan Couture and John Auers with Turner, Mason & Company, a number of reasons were cited for this conundrum affecting major oil companies and independent refiners.
Some of the important reasons cited by Couture and Auers for downstream margins decline are as follows:
While rapidly declining crude prices brought lucrative downstream margins opportunities for refiners in 2015, due to crude feedstock prices dropping at or below $35/bbl, high run rates and product inventory build exceeded demand. More importantly, going into the fall, it appears that many refiners will continue to operate at high run rates, resulting in a movement of inventory surpluses from the crude side to the product side. As mentioned by Couture and Auers with regard to the apparent need to reduce run rates, “everybody is waiting for the ‘other guy’ to go first.”
According to their viewpoint, it will take a series of events to work through these inventories, such as unplanned outages, an active hurricane season, etc. Utilization rates were especially high among the independent refiners. This goes without saying that refiners are becoming increasingly dependent on product exports to mitigate declining downstream margins. Finally, Couture and Auers cited the increasing cost of compliance for RFS requirements beyond 2016. According to their analysis, RIN prices continue to rise, and depending on the outcome of the EPA final regulations, this could become an even more significant challenge and cost burden for margins recovery.