By Barani Krishnan
Investing.com - Oil bulls have a new enemy: refiners.
As the one community that could typically be counted on to deliver the demand and strong prices typical for oil in the run-up to summer, refiners have been uncharacteristically slow in their work this year. Doing longer-than-expected plant maintenance and processing less crude than anticipated week after week, refinery owners have become a new source of frustration to oil bulls already reeling from stubbornly highly U.S. crude production.
Wednesday's market saw another example of this phenomenon when crude prices fell as much as 3% after data from the U.S. Energy Information Administration showed a surprise crude oil build of about 5 million barrels, on the average, for a second running week. The inventory spike came on the back of muted refinery runs despite Monday's Memorial Day, which marks the unofficial start to peak summer driving activity in the U.S., being just days away.
West Texas Intermediate futures, the benchmark for U.S. crude, were down $1.97 , or 3.2%, at $61.16 per barrel by 1:15 PM ET (17:15 GMT).
London Brent futures, the global benchmark for oil, slipped by $1.56, or 2.2%, to $70.62.
Crude prices slumped after the EIA reported that crude inventories rose by 4.7 million barrels last week, versus expectations for a decline of nearly 600,000 barrels. Just a week ago, crude inventories had risen by 5.4 million barrels.
"At this point, we may have to ask the question: Where are the refiners?" said John Kilduff, founding partner at New York energy hedge fund Again Capital. "And why aren't they drawing down crude the way they are supposed to?"
The second-straight weekly build of around 5 million barrels, on average, seemed largely due to weak refining activity, unusual for this time of year when gasoline makers would typically be running at full pace and pushing out as much of the motor fuel as possible in anticipation of summer driving demand.
Refineries operated at 89.9% of their capacity last week, the EIA said. The norm for refinery runs this time of year is at least 90%.
The EIA said gasoline production decreased last week, averaging 9.9 million barrels per day. Distillate fuel production, which includes heating oil, diesel, jet fuel and other transportation oils, also decreased last week, averaging 5.2 million bpd.
Despite those decreases, gasoline and distillate inventories rose last week, indicating that demand from consumers was also weak. Retail gas prices appear to be confirming the idea. The national average price of gasoline was $2.843 a gallon, according to the American Automobile Association's Daily Fuel Gauge report, down slightly from Tuesday and off nearly 2% from the 2019 high of $2.895 reached the first week of May. The price is down about 3.5% from a year ago.
The EIA said total motor gasoline stockpiles increased by 3.7 million barrels during the week ended May 17, against forecasts for a drop of nearly 816,000. In the earlier week to May 10, gasoline inventories fell by 1.1 million barrels.
Distillate fuel inventories rose by 800,000 barrels last week versus expectations for a drop of 48,000 barrels. In the previous week, distillate stockpiles rose by 84,000 barrels.
Analysts say many refineries were having longer-than-usual maintenance and less crude processing this year as they tried to meet compliance for the Jan. 1 launch of the International Maritime Organization 2020 standards. The IMO 2020 aims to reduce air pollution from sea-faring traffic by lowering the current 3.5% sulfur content in marine fuels to 0.5%.
But traders like Kilduff also suspect softer crack, or profit margins, for gasoline and other fuels this year compared to a year ago. The gasoline crack is currently at around $21 per barrel versus around $28 seen just before summer 2018.
Gasoline futures fell more than 2% to below the key $2 per gallon mark on Wednesday, pressured by the EIA data as well.
"It makes sense that refiners will want a higher margin when they ramp up gasoline production as, after all, that is their business," Kilduff said. "But they should also know that the longer they wait it out, and the more the flat price of crude suffers, the greater weight will be on the gas crack too."
Oil prices have been volatile since this week began on mixed messaging by two of the world's biggest crude exporters. OPEC's dominant member Saudi Arabia vowed to maintain its squeeze on production through the end of the year. But the kingdom's main partner in the extended OPEC+ alliance, Russia, suggested that it would base its output on market conditions, meaning it could relax cuts, especially if demand slackened.
Six months of disciplined output cuts by OPEC+ and rising U.S.-Iran and Iran-Saudi tensions of late have shored up oil prices by more than 30% this year. But the U.S.-China trade war, which is dragging everything from agriculture to technology into it and could hasten the world's slide into recession, is raising doubts about oil demand now.
"Barring any geopolitical disruptions in the Middle East, crude prices should be pressured in the days and week to come," said Tariq Zahir, managing member at New York-based oil-focused fund Tyche Capital Advisors.