The US central bank cannot be accused of complacency or misleading forward guidance. It has been reliably consistent in its approach to tackle inflation; it has been data driven. After the June pause it concluded that the job market is still robust, the economy is advancing, and core inflation remains at an elevated level therefore another 25 basis points increase to 5.25%-5.5% is warranted. It is the highest US borrowing costs have been for 22 years. As the dilemma it has been facing for quite some time now is still very much acute another hike, either after a two - months hiatus in September or an additional two months later, in November might be required. If core inflation remains stubborn the FOMC might opt for one more rise, to levels where lending rates are “sufficiently restrictive”.

Although core inflation is the salient value for the Fed the recent jump in in gasoline prices might reverse the present trend of mitigating headline inflation. US CPI has plunged form 9.1% last June to 3% a year later and has come within a whisker of the 2% target. Galloping domestic and international gasoline prices, however, could make the pause, let alone the reversing the increase in borrowing costs, a bigger challenge than expected just a month ago.

This problem, which most certainly has not escaped the attention of the ECB, which will plausibly follow in the footsteps of the Fed today, was conspicuous during yesterday’s trading session. Both distillates and gasoline swelled in what seemed to be a spectacular U-turn of the selling of crack spreads on Tuesday. CME Heating Oil gained 2.35% on the day and RBOB was breathing down its neck with a jump of 1.89%. Conversely, the two main crude oil benchmarks shed around 1% of their values.

The impressive jump in product prices was not the function of the weekly EIA stats. If you ever wanted to define the archetypal American slang of “nothingburger”, this report was it. Miniscule drawdowns in major categories, including commercial stockpiles mitigated the bearish impact of the previous night’s API figures but have failed to provide noteworthy upside impetus. The product strength, as discussed below, need to be sought somewhere else.

GMT +1	Country	Today’s data	Expectation
13.15	EU	ECB Interest Rate Decision	4.25%
13.30	US	Durable Goods Orders June	1%
13.30	US	GDP Growth Rate 2Q	1.8%
13.30	US	Core PCE Prices 2Q	4%

 

Growing Refinery Capacity, Depleted Product Stocks

 

Yesterday’s Weekly Petroleum Status Report provides a good excuse to have a detailed look at the state of the US refinery sector, the levels of major product inventories, namely distillate and gasoline, and attempt to draw a conclusion on what the next few months may have in store for us from this respect.

To begin with the US refining sector has a rising capacity and it is now in close proximity of the levels seen prior to the Covid-19 health crisis during which refiners all over the world were forced to shut. Some of them have not re-opened, others have been converted. In the whole of 2019 gross US refinery inputs stood just under 17 mbpd, which dived to 14.7 mbpd in 2020 and has averaged 16 mbpd in the January-April period this year. Operating crude oil distillation capacity fell from 18.4 mbpd in 2019 to 17.9 mbpd the following year further declining to 17.4 mbpd in 2021 only to recover to 17.8 mbpd in the first four months of this year with the April reading at 18.1 mbpd. Utilization rates plunged from 92.2% 4 years ago to 81.8% in 2020 with this year’s January-April average at 89.4% and over 90% three months ago. Further improvement is observed after April as ExxonMobil announced a capacity expansion at its Beaumont refinery, Marathon at its Galveston Bay refinery and Valero a coker expansion project at its Port Arthur refinery. 

The uptick in refinery capacity and in utilization rates (the latest 4-week average is 93.1%) does not translate into convincingly rising product inventories. Distillate stocks are unable to recover meaningfully from last year’s slump. Although they are above the historically depleted levels seen a year ago, just a few months after Ukraine was invaded, current stockpiles are materially lower than the comparable week in 2021 and they show a deficit of 13.6% to the 5-year seasonal norm. The major reason for the significantly depleted stockpiles is refinery troubles – despite growing nameplate capacity. Unplanned repairs took Phillips 66’s Bayway refinery offline whilst the reformer at Marathon’s Galveston Bay refinery has been shut down after a fire. Consultancy IIR Energy estimates that last month around 550,000 bpd of refining capacity was lost due unforeseen circumstances. These unscheduled maintenances come at a time when US exports of diesel to Europe is high and the increase in borrowing costs discourages refiners from stocking products. 

The EIA believes that US gasoline consumption could have peaked at 9.33 mbpd in 2018 but that does not mean that this product will not provide a continuous short-term support for the oil complex. The front-month CME RBOB contract has gained 18% month-to-date and the RBOB/WTI crack spread has ballooned $10/bbl to $40/bbl in the last four weeks. Domestic demand for the incumbent quarter is seen at 9.08 mbpd, up from 8.88 mbpd from 3Q 2022. Retail gasoline prices are considerably lower than a year ago, they averaged $3.684/gallon in June (albeit now ascending), an annual plunge of 27%, incentivizing motorists to take the road. US gasoline inventories are some 7.5 million bbls lower than during the same period of 2022 and show a deficit of 17 million bbls to the corresponding week in 2021. The 5-year average is 14 million bbls above the current levels. As refiners are focusing on distillate supply inventories might not build considerably for the remainder of the driving season. Despite the gradual expansion of refining capacity, the current fundamental backdrop of distillates and gasoline foreshadows somewhat scant availability in July and August and maybe beyond. Whether it is the former that will outdo the latter price wise in the medium-term or vice versa would be a topic for another report.

Overnight Pricing