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Schork Oil Outlook: Refiners Can't Afford Crude

It looks like we are ramping up turnarounds. Capacity utilization rates plunged by 292 bps to 78.4%. In fact, last week’s pace was a record low, i.e., not related to a hurricane. As such, gross refinery inputs, 13.9 MMbbl/d, fell below the 14 Mbbl thresholds in the month of January for the first time since 2000.

The winter turnaround season typically peaks in February (see illustration in today’s issue of "The Schork Report").

However, in light of poor economics, refiners have an incentive to move up their maintenance schedules this season. Refinery throughput is low because of poor margins. Margins are poor because refiners cannot pass along inflated crude oil costs to consumers.

  • Oil, NatGas, RBOB Gasoline Futures

To wit, the amount of gasoline supplied to the market averaged 18.8 MMbbl/d over the last four weeks. That is 1.6 MMbbl/d or 7.7% below the five-year average.

Thus, with consumers apparently unwilling to buy what the refiners are selling, refiners will be unwilling to make it… so the theory goes.

We agree with that theory, partially. At 78.4% of capacity, refiners' preference to minimize runs is irrefutable. On the other hand, are consumers shunning the gas pump? Last week’s retail sales numbers cast doubt on this assumption.

As we noted earlier this week, gasoline demand might be in better shape than what the DOE’s estimates suggest. According to the U.S. Census Bureau numbers, gasoline station receipts increased in December as retail gasoline prices fell.

As illustrated in today’s issue of "The Schork Report", the normal relationship between receipts and prices began to break down in October. Prices are down 2.4% since October but receipts are up 10.7% over the same period. Normally we would expect every one cent decrease at the pump to lead to an 82 million dollar decrease in gasoline station receipts. That would mean we should have seen a 0.2% decrease since October instead of the 10.7% gain we did see.

More importantly, there is still upside potential for gasoline prices. According to the U.S. Bureau of Economic Analysis (BEA), expenditure on gasoline and energy dropped from a peak of $461.4 billion in the third quarter of 2008 (when Nymex WTI topped out at $147.27) to $271 billion by the first quarter of 2009, the lowest level since Q3 2004.

In relative terms, the average consumer went from spending 19.4% of their nondurable goods expenditure on gasoline to 12.5%. With the recovery in prices, that expenditure has increased slightly, up to 14.5%.

The positive trend in gasoline station receipts in Q4 2009 suggests the rise in Q3 expenditures to 14.5% had a negligible impact. Further, vehicle miles travelled recovered to 254.23 billion miles in Q3 2009, its highest levels since Q3 2007, according to the Federal Highway Administration. Simply put, people are driving more and using more gasoline than they were in the depths of the recession.

Bottom line, consumers can afford higher gasoline prices, at this moment in time, but as Q4 earnings will show, refiners cannot afford crude oil at current levels.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.