Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

America's refineries are working overtime, and the oil market loves it. The question is whether they can keep it up.

Boiling Oil
Crude oil inputs to U.S. refineries, weekly
Source: Energy Information Administration

The Energy Information Administration's weekly report on Wednesday showed U.S. refiners processed just under 16 million barrels a day last week, which is a lot for early March. This helped to keep a lid on crude oil inventories, which rose by 1.3 million barrels, rather than the 3.2 million expected by analysts polled by Bloomberg. Along with yet more talk of a meeting next month by Russia and some OPEC countries to freeze production, it was enough to push the Nymex oil price up by 4 percent.

Unlike the supply freeze chatter, refiners actually processing more oil offers tangible support to prices. But for all their hard work, refiners can't lift this market on their own.

First, it's notable that, even though lower imports and higher refinery runs added up to 3 million barrels of crude being taken out of the system last week, inventories still went up, adding to a stockpile not seen in more than 80 years. What's more, stocks in the tanks at Cushing, Oklahoma -- the notional delivery point for Nymex futures -- continue to climb and now occupy more than 92 percent of estimated operating capacity. Meanwhile, stocks of gasoline and distillate, the two main refined product groups, both remain above the upper limit of the average range for this time of year.

This ought to raise at least one nagging doubt about the rally in oil: If refineries are working so hard, processing crude at ever higher rates, then why are stocks still so high?

So far this month, U.S. refineries have been running at an average of just over 89 percent of their capacity. For the year to date, the figure is slightly less, at 88.5 percent. This is between 3 and 3.5 percentage points higher than the average for the past five years.

A few percentage points doesn't sound like much, until you set it against overall capacity of almost 18.2 million barrels a day. Do the math and, relative to the five-year average, those extra percentage points add up to about 40 million more barrels of crude oil processed by the refiners so far this year. Which makes this chart a little odd:

Still Filling
Change in U.S. petroleum inventories, year to date
Source: Energy Information Administration
Note: Through March 11.

If the oil market was one giant retailer, then this would be the equivalent of stuffing the channel. While the sight of refineries churning through ever bigger quantities of barrels gives oil bulls a warm, fuzzy feeling, the end result has to be a meaningful drop in inventories to actually mean something positive for prices. By this time last year, crude oil inventories had actually climbed by more, yet at least product inventories were dropping:

Last Year Was Bad, But...
Change in U.S. petroleum inventories, year-to-date in 2015
Source: Energy Information Administration
Note: Through March 13, 2015.

The other concern here is that, if you run fast for long enough, eventually you either collapse or really need a nice sit-down. This year's high refinery runs continue on from a similarly frenetic 2015. The chart below shows the extra percentage points of utilization versus the five-year average since the start of last year:

Burning the Midnight Oil
U.S. refinery utilization has been running high relative to trailing five-year averages since at least the start of 2015
Source: Energy Information Administration, Bloomberg Gadfly analysis
Note: Data for March 2016 as of March 11.

Maintenance can't be deferred forever. Meanwhile, the 3:2:1 crack spread -- a benchmark measure of gross refining profit margin -- has averaged less than $19 a barrel so far this month, roughly a third below the average for this period seen over the past five years.

So the incentive for refiners to finally take a breather is there and will continue to build unless margins rise from here. The obvious catalyst for that would be a very strong summer for U.S. gasoline demand, similar to what happened last year. As I explained here, though, drivers would have to be burning rubber at a furious pace to make a meaningful dent in stockpiles. And this year, drivers aren't being treated to the sight of pump prices dropping nearly every time they hit the freeway. Driving out of the oil glut remains treacherous going for now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net