U.S. refiners struggle to meet summer demand despite high natural gas prices

Only time will tell how much record U.S. gasoline prices this summer will cripple driving demand, but don’t expect a significant increase in gasoline supplies from U.S. refiners.

The reason: In recent years, many gasoline refineries in the United States have closed or switched to other fuels, thus inhibiting the refining capacity of the United States and exacerbating the impact of high crude oil prices in the current energy crunch.

U.S. refineries were operating at 93.2% last week, the highest since December 2019, and were unusually high in a season typically associated with plant maintenance.

It all points to the stress on the U.S. energy system ahead of the summer driving season, which begins this weekend with the Memorial Day holiday.

“We’re doomed,” said Mizuho Securities analyst Robert Yoger. “Basically, we’re destined to face high prices and rising inflation, which doesn’t bode well.”

But limited refining capacity is also a global problem, according to a report by the Eurasia Group, which described a tight fuel market with little relief on the ground.

“Increased demand outpaced storage and production capacity, leading to shortages,” Eurasia Group said.

“Currently, demand is reducing inventories much faster than replacement, depleting inventories and pushing up refined oil prices. While IEA data this week showed global refinery capacity has increased, it is still below pre-pandemic levels. .”

In addition to boosting crude prices, the Ukrainian invasion has also curbed the supply of some refined products exported from Russia, especially low-quality diesel.

– Factory remodeled, closed –

Last year, U.S. gasoline prices surged more than 70 percent to record levels, with a national average of about $4.60 a gallon. Analysts at JPMorgan believe prices will continue to rise this summer to more than $6.00 a gallon.

The number of active U.S. refineries has fallen 13% over the past decade and is now at its lowest level in modern times.

The list of closures includes the Philadelphia Energy Solutions plant, which was the largest in the northeastern U.S. until it shut down in June 2019 due to an explosion.

The group includes some refineries that were shut down early in the pandemic due to lower fuel demand. Some, like Marathon Oil’s refinery in New Mexico, never restarted.

Andy Lipow of Lipow Oil Associates said the issue “became a bigger concern in the U.S. because we shut down 1 million barrels a day of refining capacity last year”.

Large U.S. refiners have also shifted some of their capacity to biofuels and other renewable fuels, given the climate-change policies favored by investors who prioritize environmental, social and governance (ESG) goals.

At its refinery in Cheyenne, Wyoming, HollyFrontier is converting a 52,000-barrel-per-day refinery from gasoline production to renewable diesel.

– Decrease in market share –

But many in the oil industry are reluctant to take on major new refinery projects, given that automakers such as General Motors and Ford are investing heavily in electric vehicles, which will reduce gasoline’s market share as a transportation fuel.

Major airlines have also pledged to use more renewable fuels to reduce demand for jet fuel, another product from oil refineries.

The experts also pointed to policies being considered by the EU, such as banning the sale of new petrol cars after 2035.

“Laws like this make it clear that at some point, demand for your product is going to drop,” said Bill O’Grady of Confluence Investment Management. “There’s very little incentive to invest.”

Building a new refinery requires significant capital, years of planning and regulatory approvals, and won’t pay off for 10 to 20 years, said Richard Sweeney, a professor of economics and economics at Boston College.

“Petrol prices are very, very high, diesel prices are very, very high,” Sweeney said, adding, “I don’t think anyone thinks that’s going to continue for a few years.”

Many refiners are using the extra cash they will receive from today’s strong market for dividends and shareholder buybacks, which are favored on Wall Street.

The last major U.S. refinery opened in 1977, and there have only been five new plants in the past 20 years, all smaller refineries.

When refineries add significant capacity, it is by expanding existing plants rather than building new projects.

“No community wants a refinery,” O’Grady said. “They’re dirty. They explode. They smell bad.”

Phil Flynn of Price Futures Group said the current global refining woes were built on “the false assumption that we can not refine”.

“We will have to balance our ESG dreams with the reality of trying to deliver products to the market.”