Publication date:
August 11, 2024
Global oil supply glut looms as U.S. refineries reduce operations
Major U.S. refiners are planning to reduce operations, potentially leading to a global oversupply of crude oil and further weakening prices.
Oil Industry
Several major U.S. oil refiners have announced plans to significantly reduce their operations in the coming quarter, signaling a potential oversupply in global crude markets. This development could further weaken oil prices, which have only seen modest gains this year despite production cuts by OPEC+ and heightened geopolitical tensions.
Marathon Petroleum Corp., the largest U.S. refinery operator, plans to run its plants at an average of 90% capacity this quarter, the lowest for the period since 2020. Similarly, PBF Energy Inc., Phillips 66, and Valero Energy Corp. are all preparing to process less crude oil than in recent years. Collectively, these four refiners account for about 40% of America's gasoline and diesel production capacity.
The slowdown in U.S. refining operations is attributed to stalling consumption and shrinking profit margins. This trend contradicts the International Energy Agency's estimate of increased global fuel processing this year, raising concerns about a potential crude oil surplus.
The mismatch between refinery closures, conversions, and new capacity additions is compressing refining margins. Additionally, the growing popularity of electric vehicles and LNG-fueled heavy trucks in China, the world's largest oil importer, is impacting demand dynamics.
While some of the U.S. surplus has found outlets in Nigeria's new Dangote mega refinery and Mexico's upcoming Dos Bocas refinery, the relief may be short-lived. Increased production from Guyana and OPEC+'s plans to boost output in the fourth quarter could further contribute to oversupply.
The potential for supply to outstrip demand is reducing the geopolitical risk premium on crude prices. Analysts predict that benchmark Brent oil could average $75 per barrel in the fourth quarter and potentially dip to $64 in the second quarter of next year.
This situation highlights the complex interplay between global oil production, refining capacity, and changing demand patterns, underscoring the challenges in maintaining balance in the oil market.
Marathon Petroleum Corp., the largest U.S. refinery operator, plans to run its plants at an average of 90% capacity this quarter, the lowest for the period since 2020. Similarly, PBF Energy Inc., Phillips 66, and Valero Energy Corp. are all preparing to process less crude oil than in recent years. Collectively, these four refiners account for about 40% of America's gasoline and diesel production capacity.
The slowdown in U.S. refining operations is attributed to stalling consumption and shrinking profit margins. This trend contradicts the International Energy Agency's estimate of increased global fuel processing this year, raising concerns about a potential crude oil surplus.
The mismatch between refinery closures, conversions, and new capacity additions is compressing refining margins. Additionally, the growing popularity of electric vehicles and LNG-fueled heavy trucks in China, the world's largest oil importer, is impacting demand dynamics.
While some of the U.S. surplus has found outlets in Nigeria's new Dangote mega refinery and Mexico's upcoming Dos Bocas refinery, the relief may be short-lived. Increased production from Guyana and OPEC+'s plans to boost output in the fourth quarter could further contribute to oversupply.
The potential for supply to outstrip demand is reducing the geopolitical risk premium on crude prices. Analysts predict that benchmark Brent oil could average $75 per barrel in the fourth quarter and potentially dip to $64 in the second quarter of next year.
This situation highlights the complex interplay between global oil production, refining capacity, and changing demand patterns, underscoring the challenges in maintaining balance in the oil market.
