(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON – Low crude prices and strong demand for gasoline are creating near-perfect conditions for oil refineries across the United States, especially those geared towards maximizing gasoline production.
Valero, the country’s largest independent refiner, made a gross margin of more than $13 on every barrel of oil processed in the second quarter, and a net margin of almost $8.50, both the highest since 2007.
Little wonder then that Valero’s share price has climbed to the highest level since December 2007.
The enormous profitability of turning crude into gasoline has incentivized refiners to run flat out since the start of the year.
The volume of crude processed by U.S. refineries last week hit a record 17.1 million barrels per day (bpd), 680,000 bpd above the prior-year level and almost 1.5 million bpd above the 10-year seasonal average.
But strong consumption has absorbed all the extra gasoline production, and motor fuel stockpiles remain moderately tight.
Gasoline consumption has averaged more than 9.5 million bpd over the last four weeks, according to the U.S. Energy Information Administration, which is almost half a million barrels above the 2014 level.
Stocks are just 217 million barrels, less than 3 million barrels, or 1.3 percent, above last year’s level.
But if stocks are adjusted for the higher rate of consumption in 2015, they stand below both the prior-year level and 10-year average.
Gasoline stocks are currently equivalent to just 22.7 days worth of consumption, the lowest seasonal level since 2008.
Low stocks explain why the gross margin for turning crude into gasoline remains at 50 cents per gallon or more, some of the fattest margins in the last decade.
The side-effect of making so much gasoline has been a surge in production of middle distillates used as road diesel, home heating oil and jet fuel.
Refining margins for middle distillates have been sliding since February and are now well under 50 cents per barrel versus WTI and under 40 cents per barrel versus Brent.
So far this year, stocks of distillates have remained only 10-20 million barrels higher than in 2014, as refiners have turned to export markets.
If jet fuel is included, mid-distillate stocks in the United States have been running about 15-30 million barrels higher than last year.
However, the surplus of distillates and jet compared with 2014 has been rising since the end of June, suggesting the strategy may be reaching its limits.
U.S. producers are competing with the big Asian refineries and newly opened and expanded facilities in Saudi Arabia for distillate customers, resulting in a worldwide glut in the middle of the barrel.
The summer driving season is now two-thirds over. U.S. refiners will likely begin ramping down their crude throughput in a few weeks’ time.
Going into the final months of the year, the gasoline market looks comparatively tight, which should keep margins relatively high.
Distillates and jet fuel are plentiful, which will keep margins in the middle of the barrel under pressure unless there is a cold winter.
Refining will always remain a cyclical business, but with gasoline demand strong, U.S. refineries should stay very profitable for a little while longer.
(Editing by Susan Thomas)
This article was from Reuters and was legally licensed through the NewsCred publisher network.