New glut concern emerges as oil refiners ramp up output

(Bloomberg) - As crude prices stabilized in recent weeks following their collapse last year, one of the key reasons analysts pointed to was bargain hunting by oil refiners.

Don't expect it to last.

Global refining has surged so much - it rose the most since 2010 in the fourth quarter - that it risks creating a glut of fuel products that prompts operators to scale back their purchases of crude, according to firms including Morgan Stanley and Wood Mackenzie Ltd. That, in turn, could start pushing oil prices back down, they say.

"Refiners may run very hard over the next few months, which is supportive for crude-oil balances near term, but they could flood product markets again," said Adam Longson, an analyst at Morgan Stanley in New York.

Brent futures have rebounded 23 per cent to US$57.18 a barrel on the London-based ICE Futures Europe exchange at 12 p.m. Singapore time on Friday from the five-year low reached on Jan. 13. While the recovery has been aided by the demand from refiners, a surge in fuel use among consumers hasn't yet materialized, according to the International Energy Agency, a Paris-based policy adviser to 29 nations.

Idled refining capacity is at 2.96 million barrels a day, the lowest for the time of year since at least 2009, according to data compiled by Bloomberg. Processing totaled 78.1 million barrels a day worldwide last quarter, a gain of 2 million from a year earlier, according to the IEA. Half of the increase was in Europe.

"Refiners in Europe are running hard and they're making too much product," said Jonathan Leitch, a London-based research director at Wood Mackenzie. The region will refine about 11.4 million barrels of crude a day this quarter, about 260,000 a day more than a year earlier, and "eventually this will produce a glut."

Total inventories of crude and refined products in the 34 industrialized nations in the Organization of Economic Cooperation and Development may approach a record of 2.83 billion barrels by the middle of the year, according to the IEA. OECD members were storing 2.7 billion barrels of crude and fuel in December, or 59 days of consumption.

Refiners' appetite for cheaper crude probably won't be met with a commensurate increase in consumer demand, said Gareth Lewis-Davies, an analyst at BNP Paribas. The immediate demand impact of lower prices is minimal because people don't rush to buy larger cars or drive more, he said.

The IEA lowered estimates for global oil demand growth this year to 900,000 barrels a day, down from a projection of 1.4 million in July, saying lower crude prices are curbing economic expansion in exporting nations such as Russia, Venezuela and Kuwait.