Feb 14, 2012:

U.S. Midwest refiners are preparing for their lightest spring maintenance season in more than five years, allowing them to soak up a growing surplus of crude in a pivotal regional market that has roiled energy trade for a year. Regional turnarounds for the February to April period -- when refiners traditionally shut units for work after the peak winter heating oil season and before the summer -- are forecast at about half the level that refiners had scheduled over the past five years, according to data from IIR Energy.

Although the closures will temporarily reduce demand for crude, causing stockpiles to rise as they normally do in the second quarter, the data suggest that this year's increase may not be as large as traders have feared. Regional crude stocks in Padd 2 are already a fifth above their norms.

If refiners stick to their plans, they will process nearly 100,000 barrels per day more crude than they normally would during those months, according to the estimates. This will help absorb surging output from North Dakota's booming Bakken oil shale play and Canada's oil sands patch.

"Seasonal spring crude distillation unit maintenance is light in Padd 2 this year," said David Elpers of IIR Energy, which gathers daily information on scheduled turnaround work at U.S. refineries and is one of the most closely watched information sources on refinery maintenance. "Because of the inflows of Canadian and Bakken crudes, the United States doesn't need a very high turnaround season to send WTI (U.S. benchmark West Texas Intermediate) into deep contango," Elpers said. The contango market structure, where front month oil futures trade at a cheaper price than later months, generally indicates a near-term glut in supply.

Whether the unseasonally high run rates are sufficient to prevent a repeat of last year's spring glut remains to be seen. Some analysts say the rapid rate of production growth will keep pressure on the premium of Brent to WTI, which widened earlier this month to a three-month high of $20 a barrel. "The recent widening of the spread between WTI and global crude prices, plus the deep discounts for Canadian and Bakken crude have lowered the floor for Midwest product prices to fall relative to Nymex or Gulf Coast values," JP Morgan said in a note on Tuesday.

At a minimum, the higher run rates will pile pressure on refined fuel prices, already depressed by high stocks and weak demand. This will keep traders on edge. Padd 2 refiners have been running this winter at more than 3.5 million bpd, the second-highest sustained rate on record since 1992. Last week they were running at 91.8 percent of capacity, down from nearly 98 percent a month ago.

LIGHT WORK

An average of 84,000 bpd of planned maintenance will be performed from February to April of this year, according to IIR Energy, compared with the five-year average of 181,000 bpd. Elpers noted the period included two years of heavy maintenance, 2009 and 2010. Including unplanned outages or operational disruptions, 224,000 bpd of refining capacity was typically offline in the Feb-April period, based on a five-year average, the IIR Energy data showed.

Refiners such as Marathon Petroleum and ConocoPhillips have been running at near full-throttle since last year, taking advantage of cheap crude that has pumped up margins. While off last year's peak, margins remain robust.

Midwest refining margins reached $19.66 a barrel in the first weeks of February, a 10-year high for that time of year, according to data from Credit Suisse. Average February-to-April refinery margins in the Midwest had reached a 10-year high in 2011 at $21.63 a barrel. Planned maintenance includes work at Valero's 180,000 bpd Memphis, Tennessee plant for five weeks in March and the shutdown of the crude distillation unit at CVR Energy's 115,700 bpd Coffeyville, Kansas refinery in late February.

KEENLY FOCUSED

For the past year, global oil traders have been riveted to the normally local dynamics of the U.S. Midwest market, which are causing waves well beyond the heartland. A lack of pipeline capacity to move record flows of crude from Canada and North Dakota away from the Midwest to the giant U.S. Gulf Coast refining hub drove up stockpiles at the Cushing, Oklahoma delivery point for the New York Mercantile Exchange WTI contract, pressuring U.S. futures.

The premium of Brent to WTI swelled to unprecedented peaks over $28 a barrel before new pipeline plans to shift the crude to the Gulf Coast drove the spread down to below $10 in November. Midwest crude inventories are rising again as turnaround season begins, currently nearly 96 million barrels, up 5 million barrels from November and more than 17 milllion barrels above the five-year average, according to EIA data released last week. The all-time high for the region was hit in April 2011 at 107 million barrels. The market is closely watching for any signs of refinery problems that could send those inventories even higher.

So far this month, unplanned outage at a gasoline unit at BP's 405,000 barrel-per-day plant in Whiting, Indiana -- the region's biggest plant -- helped drive the premium of international benchmark crude Brent to the U.S. benchmark West Texas Intermediate out to $20 a barrel last week, the widest level since October and up $9 from end-January level. The price of Canadian crude, which along with Bakken crude from North Dakota has been rushing into the Midwest as production from unconventional fields surges, tumbled on the work and focused attention on any signs of glitches and planned maintenance. "I think there will be much more attention paid to that by a broader slice of the industry than usually is the case," said Martin King, analyst at FirstEnergy Capital Corp in Calgary. "Certainly, for oil marketers, they have to do that as a general rule, but I imagine there will be a few more people paying attention."

CHOKED TO CUT?

Access to cheap crude has enticed Midwest refiners to ramp up activity, with the average volume of crude processed in the region reaching nearly 3.4 million bpd in 2011, up nearly 150,000 bpd against the five-year average. But with consumption flagging, inventories are building. Distillate stockpiles in the Midwest are near 33 million barrels, 3 million barrels over the five-year average, EIA data showed. Gasoline stockpiles hit 56.5 million barrels, 1.8 million barrels over the five-year average.

Demand for fuel has been battered by the warm winter and a slow-down in driving, with U.S. distillate demand down 1.3 percent over the past four weeks compared with a year-ago and national gasoline demand off 6.8 percent over the same period. Gasoline demand in the Midwest alone is off nearly 5 percent from last year, according to data from MasterCard SpendingPulse. Some shippers are trying to siphon gasoline and diesel away to markets east and south of the Midwest, but their efforts have been limited by the lack of infrastructure to transport the fuels.

Small volumes of fuel are making their way south aboard barges on the Mississippi and east in trucks, but not enough to make a large inventory dent in the stranded market, traders said. This, coupled with seasonal shifts in gasoline grades in Chicago, have led to ten-year lows in gasoline differentials and could weigh on margins. With those factors in mind, some analysts say refiners could be spurred to pull more units into turnarounds this spring. "There's not much on the table now but I wouldn't be surprised if you saw more maintenance come up, more companies maybe even idling assets," said Steve Mosby, vice president of ADMO Energy in Kansas City. "People are choking on product, begging people to take it off their hands."

By Reuters