REFINING: After the storms

02 December 2005
The destruction caused by hurricanes Katrina and Rita in August and September might have been confined to the Gulf of Mexico, but the impact was felt globally. With 1.56 million barrels a day (b/d) of US oil production from the Gulf shut in at the end of September - America's total production from that area - crude oil imports soared to record levels, adding further pressures on an already tight global market and pushing oil prices as high as $70 a barrel.

Worse still, numerous local refineries were temporarily knocked out, leading to the shutdown of 4.9 million b/d of refining capacity and refinery utilisation rates plummeting to 79 per cent in October, down from 93 per cent two months earlier. Again, imports were needed to satisfy domestic demand. During the week ending 21 October, the US imported 4.5 million b/d of refined products, more than 1 million b/d above this year's average.

Quick response

Thanks to the US oil industry's quick response - throughput rates at non-affected refineries were pushed up, imports were increased and crude and refined products released from the strategic petroleum reserves - the situation has since eased. Faster-than-expected recovery of refinery production and lower-than-expected demand on the back of mild climates in the US and Europe have also helped.

'The situation in the US was overcome surprisingly well,' says David Wech, a senior oil analyst at Vienna-based PVM Oil Associates. 'The availability of refined products returned sooner than expected.' But consumers in the US still felt the pinch. US gasoline prices briefly soared to $3 a gallon - even above $4 a gallon in areas directly affected by the hurricanes - in the aftermath of the storms. Prices have since retreated to a more moderate $2-2.50 a gallon nationwide.

For refiners all over the world, the past three months have added to a two-year run of improving margins. In Europe, September refining margins reached levels of up to $13 a barrel, while Asia saw spreads for a barrel go up to $8. US refiners were the biggest winners, however, with margins rising to record levels. 'Margins have improved significantly,' says Wech. 'A few weeks back we saw refinery margins in the US even surge to $50 a barrel.'

And the outlook for refiners remains positive. Although global oil demand forecasts have been revised down by 80,000 b/d for 2005 - largely due to the negative impact of the hurricanes on the US economy and weaker demand in China - overall demand for the year is projected to average 83.4 million b/d, up from 82.1 million b/d in 2004, according to the Paris-based International Energy Agency (IEA). For 2006, the agency forecasts average global demand to rise to 85.2 million b/d. And with oil demand on the up, the need for gasoline, diesel, jet fuel and other refined products is rising too.

Satisfying this demand will be a challenge. The supply-demand gap on the refinery side is closing. Despite higher utilisation rates, spare capacity has continued to drop in recent years as demand has gone up and little new output has been added. Global refinery production now stands at about 83 million b/d, with 1 million b/d to be added this year, according to the OPEC secretariat. It is estimated that more than 1 million b/d of new refining capacity will be needed worldwide each year for the next 20 years to keep up with IEA's latest oil demand forecast of about 115 million b/d by 2025.

OPEC has argued in recent months that building up refining capacity will be the key to lower oil prices. The organisation says that oil capacity today is not production-limited but largely processing-limited, unlike the US and other Western countries, which have put much of the blame for high oil prices on OPEC producers and their lack of new oil production additions.

'It is clear that the present tightness in the downstream sector, especially th

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