Several top US oil refiners are scaling back operations this quarter, intensifying worries about a potential global crude oversupply.
Marathon Petroleum Corp., which owns the largest refinery in the US, plans to run its 13 plants at an average of 90% capacity this quarter—the lowest for this period since 2020. Similarly, PBF Energy Inc. has announced plans to process the least amount of crude in three years, Phillips 66 will operate its refineries at near two-year lows, and Valero Energy Corp. is also expecting to reduce oil processing.
Together, these four refiners represent about 40% of America’s capacity to produce gasoline and diesel.
The US refining industry—a crucial factor in global supply-demand balances—is slowing as consumption wanes and profit margins shrink. This slowdown increases the likelihood of a looming crude oversupply, a factor that has kept oil prices to only a 7% rise this year despite OPEC+ production cuts and rising geopolitical tensions. This trend contrasts with the International Energy Agency’s prediction that global refineries will process almost 900,000 more barrels a day this year.
“Compressed refining margins are setting the stage for another round of extensive refinery maintenance in the US during the fall season,” said Vikas Dwivedi, Macquarie’s global oil and gas strategist, in an interview in Houston. “This will weigh on balances and could contribute to crude stockpiles in the US for the remainder of the year.”
Margins for converting crude into fuels are shrinking due to mismatches in refinery closures, conversions, and new capacity additions, as electric vehicles and LNG-fueled heavy trucks gain popularity in China, the world’s top oil importer.
Meanwhile, global crude supplies are expected to rise through the end of the year, even as new refineries come online. The US has managed to ship some of its surplus to Nigeria’s Dangote mega refinery, which has been processing oil from the Permian formation, while Mexico’s Dos Bocas refinery is set to start production this year. From 2023 to 2030, the world is expected to add about 4.9 million barrels a day of net capacity, roughly equivalent to India’s current processing capacity, according to Bloomberg NEF.
However, this relief may be short-lived as Guyana ramps up production, and OPEC and its allies plan to restore about 540,000 barrels of daily output in the fourth quarter.
While these plans are subject to change, the additional barrels are expected to hit the market just as shale producers bring online wells drilled earlier in the year. The US is on track to finish the year pumping a record 13.8 million barrels a day, about 600,000 barrels more than the same period last year, according to Dwivedi.
The potential for supply to outpace demand is diminishing the premium that geopolitical risks have added to crude prices, Dwivedi noted.
“The market is no longer willing to pay a huge premium for that because the tensions haven’t yet resulted in a loss of barrels,” Dwivedi said, who expects benchmark Brent oil to average $75 a barrel in the fourth quarter and drop to $64 in the second quarter.
Phillips 66, the largest US fuel producer by market value, cited these weaker margins as the reason for its reduced output projections. The Houston-based company plans to conduct preventive maintenance as refining margins are “weaker than we’ve seen in some time,” Chief Financial Officer Kevin Mitchell stated during the company’s second-quarter earnings call.
Marathon plans to operate at 90% capacity this quarter, which is a multi-year low for this period, according to Chief Commercial Officer Rick Hessling. The company also noted concerns about the Chinese economy and the potential volatility from the return of OPEC barrels in the short term.
