US highways grow visibly emptier as winter weather sets in. Traffic volumes decline, as does petrol consumption.
Tell that to oil refiners. The US industry is processing record amounts of crude for this time of year, taking advantage of falling oil prices and a flood of supply from shale drillers. “They’re running refineries as hard as they can,” says John Auers, executive vice-president at Turner Mason, an energy consultancy in Dallas.
Refineries’ hearty appetite has kept the price of high-quality “light” US crude closely in line with international prices, defying warnings that a glut would force deep discounts. Light Louisiana Sweet, the US Gulf coast benchmark, this week sold for just a dollar less than the international Brent benchmark, suggesting solid demand for it.
Government policy has also helped maintain strong crude runs, emboldening refiners who argue that Washington should keep in place longstanding restrictions on oil exports. Under a four-decade-old law, shippers are free to export refined petroleum products but not crude.
“The bottom line remains that we haven’t seen an oversupply of light crude,” says Jamal Kheiry, spokesman for Marathon Petroleum, an independent US refining company. “We believe the industry will continue to make investments and keep up with increased production.”
The amount of oil purchased by refiners in the US will be an important guide for world oil markets, which have cut prices to $70 a barrel because of surging output in the US and the Opec cartel’s unwillingness to cut production. Refiners are by far the dominant customers for crude, which is largely unusable unless processed.
In the week to November 28 gross inputs to US refinery distillation units were 16.554m barrels a day, the highest figure for any November week on record, according to the American Petroleum Institute. Refineries ran at 93 per cent of capacity.
Gross inputs (of barrels per day) to US refinery distillation units in the week to November 28 – the highest figure for any November week on record
The US refining system has several advantages over competitors shuttling fuel around the Atlantic Ocean, says James Fallon, a director at the consultancy IHS. The first is access to cheap natural gas used to power refineries’ energy-intensive operations.
The second is that US refiners can buy crude at a price cheaper than many global rivals, thanks to production increases from shale and rising imports of heavier oil from Canada.
Third, many US refineries are close to docks that allow them to sell freely abroad. Net exports of refined petroleum products now total 2m b/d, a reversal of the US’s historic role as an importer.
Domestic demand for fuel has been tepid since the financial crisis, but that is also now set to change. The winter slowdown notwithstanding, drivers are returning to roads in numbers last seen in 2008 and are again buying gas-guzzling vehicles.
“The F150s [a Ford pickup model] and the SUVs are flying out of the dealers’ showrooms these days,” says Charlie Drevna, president of American Fuel & Petrochemical Manufacturers, a refiner industry group. “You can’t put the spouse, the Rottweiler, the hockey equipment and the kids in a Smart car.”
Whether US refineries and their neighbours in Canada – which is exempt from crude export restrictions – succeed in absorbing the rising oil tide is a preoccupation for oil traders and analysts.
US crude oil production surpassed 9m b/d in recent weeks. Next year, the Energy Information Administration forecasts output will average 9.42m b/d.
“If production continues to grow and you still limit the ability to export crude, you will get to a day of reckoning when you can’t consume the crude,” Mr Auers says. He believes this day will dawn in the next year or two, when production tops 10m b/d.
Debate over whether to allow unfettered exports of US crude has intensified this year. Recent studies, including those by the Brookings Institution and the US Government Accountability Office, found allowing exports could spur higher crude production at home, weaken oil prices abroad and in turn reduce petrol prices for US consumers, since they are mainly steered by international markets.
Refiners are investing to take advantage of cheaper US shale oil and suggest they have the capacity to handle the rising volumes. For example Valero, the largest US refining company, plans to add crude units in Houston and Corpus Christi, Texas designed to process oil from the nearby Eagle Ford shale. Overall US refining capacity is about 17.8m b/d, up about 400,000 b/d from two years ago.
“American refiners are doing a good job of handling all the domestic production,” Valero says.
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