Oil price outlook: Markets could be hit by a global supply glut

Marathon Petroleum Corp. — the owner of the largest U.S. refiner — plans to operate its 13 plants at an average of 90 percent capacity this quarter, the lowest for the period in 2020. Similarly, PBF Energy Inc. announced that it is preparing to process the least amount of crude oil in three years, Phillips 66 will run its refineries close to a two-year minimum, and Valero Energy Corp. expected to reduce oil processing.

Together, the four refineries account for about 40 percent of America’s capacity to produce gasoline and diesel.

The U.S. fuel complex — a key factor in the global supply-demand balance — is faltering as consumption stagnates and profit margins shrink. The slowdown raises the possibility that an oversupply of crude is brewing, a threat that has limited oil prices to about 7% growth this year despite OPEC+ production cuts and rising geopolitical tensions. The trend also flies in the face of the International Energy Agency’s estimate that global fuel producers will process nearly 900,000 barrels a day more this year.

“Compressed refining margins set the stage for another round of heavy U.S. refinery maintenance during the fall season,” Vikas Dwivedi, Macquarie’s global oil and gas strategist, said in an interview in Houston. “This will affect balances and could add to the build-up of U.S. crude for the rest of the year.”

Margins for turning crude into fuels are shrinking amid mismatches in the timing of refinery shutdowns, conversions and new capacity additions, at the same time as electric vehicles and LNG-powered heavy trucks grow in popularity in China, the largest oil importer from the world.

At the same time, global crude supplies are expected to rise through the end of the year, even as new refineries ramp up. The US has managed to send some of its surplus to Nigeria’s Dangote mega-refinery – which has been feasting on oil from the Permian formation – and Mexico’s Dos Bocas refinery is scheduled to start production this year. In total, between 2023 and 2030, the world is expected to add about 4.9 million barrels per day of net capacity, roughly what India processes now, according to Bloomberg NEF.

But that relief may be short-lived as Guyana ramps up production while the Organization of the Petroleum Exporting Countries and its allies plan to bring back about 540,000 barrels a day of production in the fourth quarter.

While the plan may change, those barrels are scheduled to hit the market as shale producers bring production from wells that were drilled earlier in the year. The U.S. is expected to end the year pumping a record 13.8 million barrels per day, about 600,000 barrels more than the same period last year, Dwivedi said.

The potential for supply to exceed demand is reducing the premium geopolitical risks have added to crude oil prices, he said.

“The market is no longer willing to pay a huge premium for this because the tensions have not led to a loss of barrels so far,” said Dwivedi, who sees benchmark Brent oil averaging $75 a barrel in the fourth quarter and drops to $64. in the second trimester.

Phillips 66, the largest U.S. fuel maker by market value, cited those lower margins as the reason for its reduced production forecast. The Houston-based company plans to perform preventive maintenance as refining margins are “weaker than we’ve seen in a while,” Chief Financial Officer Kevin Mitchell said during the company’s second-quarter earnings call.

The marathon will “economically run at 90 percent capacity” this quarter, a multi-year low for the period, chief commercial officer Rick Hessling said. The company also said the Chinese economy remains a concern, and the return of OPEC barrels could inject some short-term volatility.

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