The Trouble with Refining Crude Oil

The weekly status report continues to reveal a highly unusual and persistent problem developing in the US market for crude and refined products. Specifically, the US is absolutely awash in crude oil, yet it’s experiencing a growing shortage of motor gasoline just as we enter the peak of the summer driving season.

And, more recently, the gasoline supply shortage is starting to have knock-on effects for supplies of another key class of refined products known as distillates. Key distillate fuels include diesel and heating oil. This will become a bigger issue as we head into the winter heating season; heating oil is still a key source of heat in certain regions of the nation, and the winter marks a season of heavy demand for distillate fuel.


…On Wednesday, the government reported a drawdown in crude oil inventories of 1.4 million barrels, a significantly larger decline than was expected. However, this hasn’t changed the broader picture for crude oil inventories this year. For most of 2007, crude oil inventories have remained at multi-year highs and far-above-average levels.

At first blush, this might seem totally incongruent with the recent action in crude. After all, oil prices have generally been climbing during the past few months and currently stand at well more than $70 per barrel. Typically, one would expect crude inventories that far above normal levels to put downward pressure on prices. And oftentimes a build-up in crude inventories signals weak oil demand.

But that’s just not the case today. The problem this year has been a string of refinery outages and shutdowns. Refinery capacity utilization in the US stands at 90.2 percent for this past week. That means that the nation’s refineries are operating at a touch more than 90 percent of their total rated capacity.

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