US Refining Downtime lasting longer – Utilization lower

[Charles RandallParticipant]

Marathon’s Cazalot Sees U.S. Refining Downtime Lingering Longer
2008-04-03 15:15 (New York)
By Jim Kennett
     April 3, 2008 (Bloomberg) — Marathon Oil Corp., the largest
refiner in the U.S. Midwest, said plant maintenance is taking
longer than in years past, keeping utilization of the nation’s
fuel-making capacity near the lowest level since 2005.
     “The first quarter is typically the turnaround time, but I
think we’re going to see a continuation of that,” Marathon
Chief Executive Officer Clarence Cazalot said today in an
interview in Houston. “This turnaround season is going to drag
on into the second quarter as well.”
     Upgrading of refineries to handle more cheap oil grades is
slowing the pace of maintenance projects, as is a shortage of
skilled workers, Cazalot said. The U.S. Energy Department
yesterday reported a third straight week of declines in gasoline
inventories, sending futures prices to a record high.
     U.S. refiners were running their plants at 82.4 percent of
capacity last week, according to the Energy Department. That was
the third-lowest level since October 2002, when Hurricane Lili
cut rates to 79.7 percent. Utilization hit 69.8 percent in
September 2005, after Hurricanes Katrina and Rita battered and
flooded refineries on the Gulf Coast.
     Oil prices have risen almost twice as fast as gasoline in
the past year, narrowing profit margins for refiners. Houston-
based ConocoPhillips, the second-largest U.S. refiner, today
said it cut output at some plants for economic reasons as profit
margins fell 35 percent from a year earlier. Tesoro Corp., which
owns seven U.S. refineries, said in January that it was slowing
run rates because of weak margins.

                      Intentional Slowdowns

     Gary Heminger, Marathon’s refining chief, last week
attributed low utilization rates to maintenance work and said
he’d be surprised “if there are many units down right now due
to economics.” Cazalot reiterated the point, saying Houston-
based Marathon runs its plants as close to capacity as possible.
     “When he says there aren’t many people down for economic
reasons, it means there are some people down for economic
reasons,” said James Halloran, who helps manage $35 billion in
assets, including 1.2 million Marathon shares, at National City
Private Client Group in Cleveland.
     The Energy Department plans to issue a report twice a year
on planned refinery shutdowns and their impact on markets.
Called for by the Energy Independence and Security Act of 2007,
the report would provide historical context for utilization
rates and their effect on markets.
     Refinery-specific information must be protected for
competitive reasons, including the need to buy additional fuel
before a shutdown to meet supply commitments, Cazalot said.
Marathon would contribute to a report as long as the government
doesn’t identify individual plants, said Cazalot, who added that
he doesn’t think the data will show an impact on prices.

                    Trading, Not Fundamentals

     “I don’t think that’s the volatility,” said Cazalot, who
attributed rapidly changing prices to speculative commodities
trading. “If you purely had supply and demand, the folks who
produce the oil selling to the folks that refine the oil, you
wouldn’t have that kind of volatility.”
     There is “little evidence” that speculators are driving
up prices, Jeffrey Harris, chief economist for the U.S.
Commodity Futures Trading Commission, said today at a hearing of
the Senate Energy and Natural Resources Committee.
     In addition to record crude-oil costs, refiners are facing
the prospect of declining fuel demand as the U.S. economy slows.
Federal Reserve Chairman Ben S. Bernanke yesterday acknowledged
for the first time that a U.S. recession is possible.
     At the same time, increasing use of ethanol in blends with
gasoline is displacing oil-derived fuel. Refiners can plan for
ethanol use, as well as a shift to more diesel use at the
expense of gasoline, Cazalot said. It is the U.S. and world
economies that are the “wild card,” he said.

                  Gasoline Sales Drop

     January gasoline sales were 2.7 percent lower than last
year and 5.8 percent lower than in 2006, according to government
figures. Profit from processing six barrels of crude oil into
three barrels of gasoline, two of diesel and one of heating oil,
averaged $4.85 a barrel in the first quarter, down 40 percent
from a year earlier, Bloomberg data shows.
     Margins have since recovered, and were as high as $9.128 a
barrel yesterday. That may be a short-lived benefit of seasonal
maintenance, said Ann Kohler, an analyst at Caris & Co. in New
York who rates Marathon shares at “average” and owns none.
     “The big concern is that at $100 oil, we’re going to have
higher gasoline prices,” Kohler said. “With the weakened
economic environment, you’re going to have gasoline demand
destruction.”

–Editors: Tony Cox, Kim Jordan.

To contact the reporter on this story:
Jim Kennett in Houston at +1-713-353-4871 or
jkennett@bloomberg.net.

[Charles RandallParticipant]

Here is view from Marathon that US refining downtime is taking longer partially due to all upgrading for heavy crudes slowing maintenance work, but doesn’t believe economic reasons are responsible for decreased utilization rates.  
 
However, current refinery utilization this week are @ 82.4% the third lowest since Hurricane Lili Oct 2002 79.4% or Hurricanes Rita/Katrina Sept 2005 69.8%. But Tesoro and COP have said they cut rates because margins are down 35%, and
it is clear the high prices in weakened economic environment is causing some demand destruction (along with higher ethanol blending & diesel use backing out demand). Fed has admitted for first time yesterday that an economic recession is possible.
 
The US Chief Economist for Commodity Futures Commission continues to bury his head in sand or (other body parts) claiming prices are not driven by speculative trading – several Senators stated opposite view. Reality check is @ a$66/BBL crude gasoline was $3/gal currently crude is $104/BBL and gasoline is $3.2/gal dropping margins by 40-50% despite little drop in demand and it hasn’t been fundamentals driving volatility spikes in market.
 
I have been tracking the reduced utilization / production in US via the petcoke production which has remained at / below 2004 levels (39-40 mm mtpy) for 4 years now despite adding some +3.5-5.0 million mtpy of additional coking capacity via new cokers or debottlenecking.
This capacity exist as overhang and the larger number of coker projects coming online this year (plus last year’s new cokers operating for full year production) and long time idled capacity like BP Tx City’s 1 mm mtpy petcoke finally coming back online.
 
Petcoke, much like the refining prospects – has all making’s this year for a perfect storm of higher capacity coming online at time of price driven demand destruction, displaced demand from alternate fuel use, and recessional economic environment making its normal 4-5 year cycle (always more prevalent at end of 2 term president’s).
Regards

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