High crack spreads to drive elevated U.S. refinery utilization through the summer

In our May 2022 Short-Term Energy Outlook (STEO), we forecast that U.S. refinery utilization will reach as high as 95% on a monthly average basis this summer in response to high product prices and crack spreads for gasoline, distillate fuel oil, and jet fuel. Crack spreads are the difference between the price of crude oil and the wholesale price of a refined petroleum product, and industry participants use them to estimate refining margins. We expect prices for gasoline, distillate fuel oil, and jet fuel to begin decreasing after May as refinery maintenance from April comes to an end, increasing production and reducing some of the pressure on prices in the current market. Even with increased refinery operations and declining prices this summer, we still expect that wholesale fuel prices and crack spreads will remain well above historical levels through the summer.

We estimate U.S. refinery utilization in April was 90% of operable capacity as planned maintenance—which often occurs between February and April—and unplanned refinery outages contributed to relatively lower refinery inputs despite rapid increases in April refining margins. In May, we expect refinery utilization to increase to 93% and then to 95% in June, before averaging 94% in the third quarter of 2022 (Figure 1). Refinery utilization usually increases during the summer as demand for gasoline increases in the United States. In addition to this normal seasonal trend, lower product inventories (both domestic and global) this year have provided additional financial incentives for refiners to increase refinery utilization and throughput to meet demand for refined products. These low inventories combined with effects from Russia’s full-scale invasion of Ukraine and associated sanctions have contributed to rapid increases in prices that encourage refiners to increase production. One indicator of these market conditions, the U.S. 3-2-1 refinery crack spread calculated against West Texas Intermediate (WTI) crude oil, increased by over 100% from February through April.

We expect that refinery utilization, at nearly 95%, will reach near the upper limits of what refiners can consistently maintain this summer. At the same time, refinery crude oil inputs—or refinery runs—are likely to reach a high of 16.8 million barrels per day (b/d) in June; this high remains below the five-year (2017–2021) high for June of 17.7 million b/d set in 2018. We also expect production volumes for major products to be below their five-year highs through the summer. This trend results from reduced refinery capacity in the United States after several refinery closures and conversions took place during 2020. These closures were largely motivated by decreased vehicle fuel demand related to COVID-19 pandemic responses in 2020. However, other factors also contributed to lost capacity; for example, the Philadelphia Energy Solutions refinery closed because of an explosion in 2019. Other global refiners have faced similar pressures since the beginning of the COVID-19 pandemic, and the resulting decrease in global refining capacity is contributing to present low product inventories and higher crack spreads around the world.

Crack spreads for gasoline, distillate fuel oil, and jet fuel all increased through March and April, even amid rising crude oil prices during the same period (Figure 2). The monthly average U.S. spot market crack spread for gasoline, calculated against WTI, increased $0.36 per gallon (gal) from February 2022 to April 2022. Crack spreads for distillate fuel oil increased $0.94/gal, and jet fuel crack spreads increased $1.04/gal over the same time period. These levels are well above typical seasonal crack spreads for April. Gasoline crack spreads are 68% higher than the five-year average, and jet fuel and distillate fuel oil crack spreads are even higher at 276% and 221% of five-year average levels, respectively. Crack spreads for gasoline and distillate fuel oil were already trending toward above-average levels during 2021, reflecting ongoing inventory draws, but increased sharply in response to Russia’s full-scale invasion of Ukraine.

Prices for gasoline, distillate fuel oil, and jet fuel have all increased substantially since February, but the increases in gasoline have been relatively lower than those for jet fuel and distillate fuel oil (Figure 3). The summer driving season in the United States normally results in higher relative prices for motor gasoline compared with distillate fuel oil. Prices typically revert to a premium on distillate in the fall and winter as a result of increased demand for heating oil and agricultural demand for diesel, while gasoline demand is seasonally lower. However, low global distillate inventories in the current market are presenting the opposite price signal this summer, as wholesale distillate prices are substantially higher than gasoline prices.

Refiners can, to some extent, adjust the relative yield of gasoline or distillate they produce out of each barrel of crude oil. However, this yield is subject to significant mechanical limitations based on the equipment and configurations of the existing U.S. refinery fleet, as well as the composition of crude oil grades available to U.S. refiners. The degree to which the entire U.S. refining fleet is able to collectively adjust overall yields of U.S. refinery production remains a source of uncertainty in our STEO forecast. Broadly, we expect refiners will shift to maximize their yield of distillate per barrel of crude oil. We expect the U.S. fleet-wide refinery yield for distillate to average 31.0% per barrel of crude oil in 2022, about equal to the distillate yield in 2019, which was the highest it had been since 2014, before the disruptions of the COVID-19 pandemic led to temporarily increased distillate yields in 2020 because of low utilization and substantial decreases in jet fuel consumption.

We expect increased utilization for U.S. refiners to contribute to increases in gasoline inventories as higher distillate margins contribute to high refinery utilization, even as gasoline inventories build to above-average levels (Figure 4). As previously forecast in our Summer Fuels Outlook released with the April STEO, higher gasoline production combined with near-average levels of gasoline demand this summer will contribute to increases in gasoline inventories. We expect gasoline inventories will increase to above-average levels by July of this year, which should begin to put downward pressure on gasoline prices in the second half of 2022. However, our forecast remains subject to substantial uncertainty, including the risk of future changes in the crude oil price, additional geopolitical events, or additional unplanned refinery outages, such as those related to storms or other mechanical malfunctions.

In contrast to the growing gasoline inventories, we expect high global demand for distillate to limit builds in U.S. distillate inventories, keeping them below the seasonal range through our forecast. Gradual increases in global demand are likely to continue encouraging high utilization for refiners, especially as long as sanctions and boycotts on energy exports from Russia continue to push distillate volumes from Russia’s refiners out of the market. At the same time, although refiners will have a financial incentive to maintain higher utilization, lost overall production capacity will mean higher prices and lower inventories are likely to continue as long as demand for distillate remains high.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.