(Repeats column published on June 2 with no changes. John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2slLbeF
By John Kemp
LONDON, June 2 (Reuters) - U.S. oil refineries are processing record volumes of crude but stocks of refined fuels remain well contained thanks to strong exports and demand at home.
U.S. refineries processed 17.5 million barrels per day (bpd) of crude in the week ending on May 26, according to the U.S. Energy Information Administration (“Weekly Petroleum Status Report”, EIA, June 1).
Throughput was more than 1.2 million bpd higher than at the same point in 2016 and 2.2 million bpd above the 10-year seasonal average.
Record refinery runs have helped pull down U.S. crude stocks by 31 million barrels since the end of March, with inventories drawing down much faster and earlier in the year than normal.
But despite fears that record processing would result in a build up of unsold products, stocks of gasoline and diesel have generally moved in line with normal seasonal patterns.
Part of the explanation lies in the strength of exports, mostly to markets in Central America, South America and the Caribbean, where ageing and inefficient refineries have struggled to meet growing demand from consumers.
U.S. refineries are increasingly geared towards meeting demand from the rest of the hemisphere rather than just the United States.
U.S. refiners and traders exported 640,000 bpd of gasoline in the week ending on May 26, and a near-record 1.25 million bpd of distillate fuel oil.
Fuel consumption at home is also now running at record or near-record levels, according to an analysis of EIA data.
Gasoline supplied to domestic customers in the United States hit a record 9.8 million bpd last week, an increase of roughly 330,000 bpd compared with the same period in 2016.
Distillate supplied averaged 4.1 million bpd, significantly higher than in 2016, though still below the record set in 2007.
From the end of August 2016, the Energy Information Administration introduced a new and more accurate methodology for calculating exports and estimating weekly gasoline and diesel consumption (“Statistical methodology of estimating petroleum exports using data from U.S. Customs and Border Protection”, EIA, Aug. 2016).
The new methodology uses real-time information obtained from U.S. Customs to estimate current weekly exports where the prior methodology relied on a two-month lagged model to derive estimated values, which in turn introduced a potential source of errors into estimates for domestic consumption.
So estimates for consumption before and after August 2016 are not strictly comparable but the older data can be corrected in retrospect using reliable monthly export data from the U.S. Census Bureau.
The export-corrected time series show consumption of both gasoline and distillate fuel oil has been running at a high level since March.
The increase in gasoline and distillate demand is consistent with more comprehensive monthly data showing consumption of both rising strongly in March after being relatively weak in January and February (“Petroleum Supply Monthly”, EIA, May 2017).
Strong fuel demand in export markets and at home explains why U.S. refining margins have held up well despite the surge in processing rates (“Key commodity prices and differentials”, Valero, May 22).
Refinery margins in most parts of the United States have been little changed during the second quarter of 2017 compared with the same period in 2016, despite much higher throughput.
According to the EIA, U.S. refiners have added almost 500,000 bpd of atmospheric crude distillation capacity since the start of 2016.
Building and expanding crude units is expensive so once these units were commissioned there was a strong incentive to use them to start recovering the cost.
U.S. refineries are generally more efficient than their rivals in Europe and certainly more so than refineries in Latin America.
U.S.-based refiners also have lower transportation costs given their proximity to sources of crude from Texas, New Mexico and North Dakota, and being closer to major fuel customers than rival suppliers in Europe and Asia.
U.S. refiners are therefore well placed to capture market share from weaker and less flexible rivals in other parts of the Atlantic Basin.
With so much fuel entering the supply chain there must be some risk that either the domestic or export markets will become saturated.
But the resilience of refining margins indicates the risk is not thought to be high at the moment and is giving refiners a continued incentive running at record volumes.
“Record U.S. refinery runs fail to lift crude oil prices”, Reuters, April 27
“Hedge funds turn bearish on oil and refined fuels”, Reuters, May 8, (Editing by David Clarke)