U.S. Top Refiners Cut Output, Looming Oil Supply Glut?

Profit margin contraction and slowing demand have led U.S. refiners to slow down production, which could further exert pressure on the balance of supply and demand in the oil market. This quarter, some of the top U.S. refiners are reducing the operation of their facilities, intensifying concerns about a global oversupply of crude oil.

Marathon Petroleum Corporation, the largest refiner in the United States, plans to maintain an average operating rate of around 90% at its 13 refineries this quarter, the lowest level for this period since 2020. Similarly, PBF Energy announced that the amount of crude oil it processes will be at its lowest in three years, Phillips 66's refineries will operate at levels close to the lowest in two years, and Valero Energy is expected to reduce its refining capacity.

These four refineries account for approximately 40% of the U.S. capacity for gasoline and diesel production.

As a key factor in the global balance of supply and demand, the U.S. fuel production system is faltering due to stagnant consumption and shrinking profit margins.

Phillips 66, the largest fuel producer by market value in the United States, cites lower profit margins as the reason for its reduced production expectations. Kevin Mitchell, the Chief Financial Officer of the Houston-based company, stated during the company's second-quarter earnings call that due to "weaker refining margins than we've seen for some time," the company plans to carry out preventive maintenance.

Rick Hessling, Chief Commercial Officer of Marathon, said the company will operate at a "90% load rate" this quarter, a multi-year low for the same period. The company also stated that the Chinese economy remains a concern, and the recovery of OPEC+ crude oil production may bring some short-term volatility.

The slowdown in U.S. fuel production increases the likelihood of an imminent oversupply of crude oil. Despite OPEC+ production cuts and heightened geopolitical tensions, this threat has limited the increase in oil prices to about 7% this year.

This trend also contradicts the estimates of the International Energy Agency (IEA), which expects global fuel producers to process nearly 900,000 more barrels of crude oil per day this year.

Vikas Dwivedi, a global oil and gas strategist at Macquarie, said in an interview in Houston: "The compression of refining margins is paving the way for another round of large-scale refinery maintenance in the United States this fall. This will put pressure on the balance of supply and demand in the oil market and may lead to an increase in U.S. crude oil inventories for the remainder of the year."The profit margins for converting crude oil into fuel are shrinking due to the mismatched timing of refinery closures, modifications, and the addition of new capacities, coupled with the growing popularity of electric vehicles and heavy trucks fueled by liquefied natural gas in China, the world's largest oil importer.

In the meantime, despite the commissioning of new refineries, global crude oil supply is expected to increase before the end of the year. The United States has successfully shipped some excess crude oil to Nigeria's Dangote mega refinery, which has been consuming crude oil from the Permian Basin, and Mexico's Dos Bocas refinery is scheduled to begin production this year.

According to data from Bloomberg New Energy Finance (Bloomberg NEF), overall, the world is expected to add about 4.9 million barrels per day of net fuel capacity between 2023 and 2030, roughly equivalent to India's current processing volume.

However, this relief may be short-lived, as Guyana is increasing its crude oil production, and OPEC and its allies plan to restore about 540,000 barrels per day of production in the fourth quarter.

Although plans may change, additional supplies will be released to the market as shale oil producers extract crude oil from wells drilled earlier this year.

De Viviedi said that the United States is expected to reach a record daily production of 13.8 million barrels this year, an increase of about 600,000 barrels compared to the same period last year. He said that supply may exceed demand, which will reduce the premium on crude oil prices due to geopolitical risks.

"The market is no longer willing to pay a huge premium for this, as tensions have not yet led to a reduction in crude oil production," De Viviedi said, predicting that the average price of benchmark Brent crude oil in the fourth quarter will be $75 per barrel.