Glut Fears Grow with US Refineries Operating All-Out Despite "Lackluster" Demand

Another troubling aspect to the oil glut was brought to light on Wednesday with the disclosure that U.S. refiners are operating all-out - to the tune of 17.3 million barrels per day (bpd) last week, or 94.1 percent of capacity - even though demand is tepid at best.

According to Reuters, the nation's refiners increased their activity even as demand for gasoline last week declined, and this raised alarm in the analytical community, headed by John Kilduff, founding partner of Again Capital, who said, "They're cranking out a lot of fuel here in the face of demand that is lackluster; they could be building a glut for themselves on the other side of the refinery."

Tom Kloza, global head of energy analysis at Oil Price Information Service, remarked, "I can't believe how high and hard we are running refineries, and I think ultimately that's going to sabotage the gasoline market because we keep seeing gasoline demand that is consistently below last year."

To which Matt Smith, director of commodity research at ClipperData, added, "The crack spread — the profitability of refining crude products — has just dropped below year-ago levels, and yet we're seeing refinery runs hitting an absolute high last week.....and so it is a concern."

The refinery worries came on the heels of further oil glut fears on the international front, with Arkady Dvorkovich, deputy prime minister of Russia, stating that although his nation is willing to keep its oil production stable in the spirit of adhering to the troubled Organization of the Petroleum Exporting Countries (OPEC) crude cutback initiative, it will increase input if it feels that prices are unlikely to fall as a result.

But it's anyone's guess whether Russia - which has a long history of waffling on agreements - will endure another six months of cutbacks, especially considering that the country's energy ministry outlook for the second half of 2017 implies an average output of about 11.02 million bpd, or 75,000 bpd higher than its target under the OPEC deal.

It's also anyone's guess if the deal will be extended in light of de facto leader Saudi Arabia - which has acted magnanimously throughout the cutbacks but indicated that its patience is limited -  losing market share to Iran and Iraq: Bloomberg data reveals that while the Saudis cut production to as low as 9.87 million bpd in January and 10 million in March, Iran's output rose to 3.8 million bpd in January, the highest since April 2010; Iraq pumped 4.43 million bpd last month.

Edward Bell, commodities analyst at Emirates NBD PJSC, pointed out that Iran and Iraq increased crude sales to China last month, while Saudi Arabia slipped behind Russia and Angola as the largest suppliers to the nation: "The Saudis are losing out because other countries are able to squeeze out more production."

Still, amid the accumulation of gloomy news was a disclosure by the Energy Information Administration that U.S. commercial crude inventories fell by 3.6 million barrels to a total of 528.7 million barrels in the week through April 21, and this was enough for oil on Wednesday to rebound from earlier losses, with West Texas Intermediate settling up 6 cents at $49.62 and Brent dropping 37 cents to $51.73.

Earlier this week, Kloza suggested that the accumulation of negative market events and circumstances will result in crude trading in the upper end of the $40 range and ultimately remain in the low to mid $50s.