Some of the top U.S. refineries are scaling back operations at their facilities this season, fueling concerns about a developing global crude supply glut.
Marathon Petroleum Corp., the owner of the largest U.S. refinery, plans to operate its 13 plants at an average of 90% capacity this quarter, the lowest level since 2020. Crude output is set to fall at least three years, with operations at the Phillips 66 refinery near a two-year low and Valero Energy Corp expected to cut oil processing.
The four refineries together account for about 40% of U.S. gasoline and diesel production capacity.
The U.S. fuel production complex – a key factor in the global balance between supply and demand – is crumbling as consumption stalls and profit margins shrink. The economic slowdown has heightened the possibility of a looming crude oil supply glut, a threat that has limited oil price gains to around 7% this year despite OPEC+ production cuts and rising geopolitical tensions. The trend also runs counter to forecasts from the International Energy Agency, which expects global fuel manufacturers to increase oil processing by nearly 900,000 barrels per day this year.
Vikas Dwivedi, Macquarie’s global oil and gas strategist, said in an interview in Houston that the squeeze on refinery margins is setting the stage for another round of large-scale maintenance at U.S. refineries in the fall. “This will put pressure on the balance and could increase U.S. crude production for the remainder of the year.”
Profits from turning crude into fuel are shrinking due to a mismatch in the timing of refinery closures, renovations and new capacity additions, while electric cars and heavy-duty trucks fueled by LNG are growing in popularity in China, the world’s top oil importer.
Meanwhile, global crude supplies are expected to increase by the end of the year, even as new refineries are added. The United States has been able to ship some of its remaining oil to Nigeria’s massive Dangote refinery, which has been enjoying oil from the Permian formation, while Mexico’s Dos Bocas refinery is scheduled to start production this year. According to Bloomberg NEF, global net production capacity is expected to increase by about 4.9 million barrels per day between 2023 and 2030, roughly equivalent to India’s current processing volume.
But that relief may be short-lived as Guyana ramps up production and OPEC and its allies plan to restore output of about 540,000 barrels per day in the fourth quarter.
While that plan could change, the barrels are expected to hit the market as shale producers gain production from wells drilled earlier this year. Dwivedi said U.S. production is expected to reach a record 13.8 million barrels per day this year, an increase of about 600,000 barrels from the same period last year.
He said the potential for supply to exceed demand is reducing the crude price premium caused by geopolitical risks.
“The market is no longer willing to pay a huge premium for this because the tensions have not resulted in oil losses so far,” Dwivedi said. He expects Brent crude prices to average $75 a barrel in the fourth quarter and fall to $64. Second season.
Phillips 66, the largest U.S. fuel maker by market value, said falling profit margins were the reason for lowering its production forecast. The Houston-based company plans to conduct preventive maintenance because refining profits are “weaker than we have seen in some time,” Chief Financial Officer Kevin Mitchell said on the company’s second-quarter earnings call.
Chief Commercial Officer Rick Hessling said Marathon “will operate economically at 90% capacity” this quarter, its lowest level in years for the period. The company also said China’s economy remains a concern and the return of OPEC oil production could bring some volatility in the short term.
