Refinery Outages Add Pressure on Oil as Worsening Glut Looms

Oil Producers Flood Market in Search for Demand

Crude markets already in a downward spiral sank under the weight of a supply report showing increasing stockpiles of oil after a major U.S. Midwest refinery shutdown.

And the oversupply may just be getting started.

A heavy slate of refinery maintenance in the region this fall threatens to make inventory builds in Cushing, Oklahoma, a common occurrence. The outages will follow trouble at BP Plc’s Whiting refinery in Indiana that meant about 1.5 million barrels of oil didn’t get consumed last week.

“There is a lot of maintenance scheduled in the fall,” said John Auers, senior vice president at Turner Mason & Co., a Dallas-based energy consultancy. “Having a lot of plants down for turnarounds tends to push us into an oversupply situation and starts widening out the domestic-international spread.”

Refinery outages would leave more crude to fill storage tanks, forcing U.S. prices to fall to encourage shippers to move the oil to the coast, where it can compete with pricier foreign barrels.

The pressure from crude piling up in tanks in Cushing and elsewhere in the country fell heavily on oil prices and stocks on Wednesday after the Energy Information Administration reported an increase in U.S. inventories.

Crude plunged to a six-year low in New York and approached the $40-a-barrel mark, while oil and natural gas producers were the worst performers on the Standard & Poor’s 500 Index. Citigroup Inc. said the U.S. benchmark oil price could drop to $32 on the persisting supply glut. Futures traded at $40.21 at 10:43 a.m. London time on Thursday.

Stockpiles Gain

The EIA said crude supplies rose 2.62 million barrels last week, when a 820,000 barrel stockpile decline was projected by analysts surveyed by Bloomberg.

In Cushing, the delivery point for U.S. crude futures, supplies rose by 326,000 barrels last week at a time of year when inventories usually fall as refineries ramp up production to meet peak summer driving demand.

In the Midwest, the BP outage could last into September, and the refinery is planning more maintenance that month. As many as seven other Midwest refineries could shut units for extended time this fall.

Crude processing capacity in the region could drop 530,000 barrels a day in next month and 660,000 in October, according to Amrita Sen, chief oil analyst for Energy Aspects Ltd. in London. Last year, about 240,000 barrels a day was offline in September and 460,000 in October, according to data compiled by Bloomberg.

Some refineries may try to reschedule their maintenance to take advantage of the high profit margins from low crude prices. And low prices could force producers to slow drilling programs and cut output.

“Prices are so low there could be a slowdown in production,” Turner Mason’s Auers said. “There are a lot of moving pieces.”

For now, though, there are more signs of stress on storage than reprieve.