US bumping up against the limits of its refining capacity for light crude from shale wells

U.S. refiners are maxing out on the shale they can process as production surges, contributing to a blowout between domestic and global oil prices, or the WTI-Brent spread. Exports can’t ramp up fast enough to keep storage levels from rising and domestic prices from further weakening. Aggressive midterm shale-output forecasts should be tempered.

The combination of torrid U.S. production, refiners’ shale-processing-capacity crunch, infrastructure bottlenecks and exponential yet limited export growth is depressing domestic prices and widening the WTI-Brent spread to levels not seen since 2015. The dynamics driving the spread blowout show no signs of abating and will create an environment supporting domestic refiners’ profitability while hurting E&Ps. U.S.-based refiners, which consume discounted domestic crude and sell globally priced petroleum products, include Delek, HollyFrontier, Andeavor (being acquired by Marathon Petroleum), Valero, PBF and Phillips 66. E&Ps such as Pioneer, EOG, Diamondback, Devon, Newfield and Whiting will be affected by the pricing pressure of oil stranded in the continental U.S.

While generally benefiting from the widening WTI-Brent, U.S. refiners are reaching the limits of the amount of shale they can process to maximize their profits. Oil from shale is a lighter grade of crude than typically processed by domestic refiners, which were built well before the shale revolution started and are geared toward processing heavier grades of crude oil. Shale has pushed out other light oil grades, including Arab Light, Canada’s Syncrude and African blends. Refiners are now investing in units that can process higher quantities of shale into high-value refined products.

Exxon Mobil recently said it’s going ahead with a multibillion-dollar expansion of its Gulf Coast light-oil refining capability. The expansion won’t be completed until the next decade.

U.S. refiners consume over 17.5 million barrels of oil a day, while the nation produces only 10.7 million. Although they have increased investments to process more shale, imports remain a necessity not only to operate near capacity, but also to maximize profitability. Imports are largely the heavier types of crude that the U.S. refiners were built to process. In the U.S., Gulf Coast refineries still need to bring in heavy Mexican, Iraqi, Canadian and Venezuelan crude to run optimally, while East Coast refineries continue to import Canadian and Nigerian crudes (in part due to the higher cost of oil transported from the Gulf Coast on Jones Act vessels relative to foreign-flagged carriers). U.S. oil output has more than doubled from about 5 million barrels a day since 2008.
There is more.

One of the problems for the refiners is that they are forced to pay for nonproductive RIN mandates toed to teh ethanol requirements.  The billions spent on these worthless requirements could more productively be spent on converting the refineries to handle the light crude and thus reducing the need for importing oil which was the stated purpose for requiring ethanol to begin with.  Doing away with the RIN requirement would be a good start in making these refineries more efficient.  It would eventually lead to energy independence and give the US a strategic advantage.


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