Refineries Suffer on Weak Fuel Prices

Oil prices are sinking once again as Libya increased their oil production. The country is exempted from OPEC+’s supply cuts, meaning the group will need to find other areas to offset rising crude flows. Libya could increase its output by as much as 1 million barrels per day – a huge number when every barrel of crude pumped contributes to the glut of oil inventories.

Refineries are in a tough spot heading into the winter as fuel demand has been suppressed. Refiners typically require 3:2:1 crack spreads – the price difference between crude and refined products – to be at least $10/bbl to turn a profit. Throughout history, spreads rarely fall below this range for prolonged periods. Yet refiners have had to contend with spreads averaging below $10/bbl since August. On one end, crude prices have slowly stabilized enough for producers to begin restarting output; on the other end, demand remains low. Reuters recently highlighted that refiners globally are facing tough financial pressures – they lack the cash to invest in maintenance but also will not benefit from skipping the fall refinery turnaround season.

Weak crack spreads have halted the long, slow recovery in refinery utilization beginning in May. Climbing as high as 82% utilization in August, a strong of Gulf Coast hurricanes caused refineries to fall offline, taking utilization briefly down to 72% again. While refineries would typically rush to resume operations, refineries took their time in restarting.

Heading into the winter, refinery utilization typically runs high to produce enough heating oil for the winter months.  This year, diesel is bountiful, so refiners are lacking the financial incentive they need to increase runs. At the same time, they’re hurting for cash flow, so they need more throughput to generate profits.  Given the pressures on both ends, refiners will likely remain at reduced rates for a while – at least until crack spreads (and fuel prices) rise enough to justify more throughput.

For consumers, all this means that fuel prices can’t get much lower – at least without crude oil prices dropping first. Fuel prices are a combination of crude oil costs, refining costs, shipping and transport fees, and regional supply/demand variations. At the national level, the first two factors are dominant, though regional price swings can occasionally make a material difference. With 3:2:1 crack spreads already well below historical averages, don’t expect fuel prices to fall much further without crude oil falling as well. It also means that if fuel demand picks up, fuel prices could rise even as crude prices remain steady.

The oil complex is facing heavy losses this morning in response to Libya increasing its production. WTI crude is trading at $39.72, down $1.39 (-3.4%) from Friday’s closing price.

Fuel prices are also facing heavy losses this morning, giving up gains made last week. Diesel is trading at $1.1251, down 3.4 cents (-2.9%). Gasoline is currently $1.1857, down a nickel (4.1%) from Friday’s close.