Refinery utilization drops due to cold weather but will remain high in 2023 and 2024

In our January 2023 Short-Term Energy Outlook (STEO) we forecast prices and volumes of petroleum refining through 2024. Our forecast takes into account a cold weather system that caused outages and mechanical complications in the U.S. refining sector in late December 2022 and early January 2023. The storm contributed to a sharp but temporary reduction in U.S. refinery utilization–the amount of crude oil and other oils input into refineries divided by the total capacity of refineries. We expect that some of these refinery outages will persist through the first quarter of 2023, however, we expect annual refinery utilization to remain near 2022 rates in 2023 and 2024 in response to high petroleum product prices.

Beginning on December 21, Winter Storm Elliott began moving through the U.S. midcontinent, bringing below-freezing temperatures throughout the Midwest, the East Coast, and the Gulf Coast. The potential for mechanical operating challenges and power outages related to the low temperatures led many U.S. refiners in the affected areas to reduce refinery runs or temporarily close their facilities. In the days after the storm, trade press also reported equipment damage at several refineries, including a major incident at Suncor’s Commerce City refinery in Colorado. Suncor has indicated will not resume operations at the facility until late in the first quarter of 2023. According to our Weekly Petroleum Status Report, the freezing temperatures caused U.S. average refinery utilization during the week ending on December 30 to drop to 79.6%, its lowest utilization rate since March 2021, when a similar cold front substantially limited the utilization rate of refiners on the U.S. Gulf Coast. The storm at the end of 2022 similarly limited the utilization rate of U.S. Gulf Coast refiners, who saw average utilization drop to 77.7%, while the Midwest and Rocky Mountain regions saw regional average utilization drop below 80% (Figure 1).

As refiners begin to recover from the cold temperatures and equipment damage, we forecast refinery utilization will average 87.0% in January 2023 in our latest STEO (Figure 2). The decrease in utilization at the end of December drove our estimate of monthly average utilization down to 89.3% from November’s average of 93.8%. Despite this decrease in December, overall refinery utilization in 2022 was high. We estimate annual average utilization in 2022 averaged 91.7%, up more than five percentage points from 86.6% in 2021. We forecast refinery utilization will reach 91.5% in 2023 and will decrease slightly to 91.0% in 2024.

High crack spreads and elevated prices for petroleum products in the United States and globally drove refinery utilization in 2022, particularly in the first half of the year (Figure 3). We calculate the 3-2-1 crack spread by subtracting the price of a gallon of crude oil (the input) from the combined price of two-thirds of a gallon of gasoline and one-third of a gallon of diesel (the output). The difference between the two prices represents an estimate of refinery margins, as well as an approximate indicator of profitability. Movement in the 3-2-1 crack spread accounts for general movements in the individual crack spreads for gasoline and diesel, favoring refineries that produce a larger share of gasoline, such as those in the United States. We expect petroleum product prices in 2023 will remain lower than in 2022 due to more production by refineries and lower crack spreads, and will continue to generally decrease in 2024. Nevertheless, petroleum product prices will still remain high compared with 2021 or the average from 2017 to 2021.

Lower prices in our forecast are driven primarily by our expectation of slower economic growth, which would reduce demand for gasoline and diesel. We also forecast that increased production of finished petroleum products will contribute to lower prices. The impending ban on imports of refined petroleum products from Russia into the EU in February 2023 presents a potential source of disruption and significant source of uncertainty in our forecast.

Although we forecast lower utilization of refinery capacity in 2023, we also forecast more production of finished petroleum products and more inputs to refineries in 2023 compared with 2022. This increase in production despite lower average refinery utilization is due to a major refinery expansion at ExxonMobil’s Beaumont refinery, which we assume will add 250,000 barrels per day (b/d) of additional crude oil processing capacity to the facility in June 2023. The expansion will be the largest capacity addition to the U.S. refining fleet since 2013 and follows a series of refinery capacity closures in 2020 and 2021, due, in part, to the lower-margin environment that followed the COVID-19 pandemic (Figure 4). Refinery capacity expansions are typically viewed by major refining companies as long-term investments and similarly require an extended period of planning, design, construction, and regulatory approval before they can begin operating. A final investment decision on the ExxonMobil Beaumont expansion was first reached in January 2019, although the project faced logistical delays related to the pandemic.

In 2024, we estimate lower refinery utilization resulting from lower margins on petroleum products. Our 2024 forecast also accounts for the planned closure of LyondellBasell’s Houston refinery at the end of 2023, which will reduce refinery capacity compared with 2023.

Although we do not publish a forecast for refinery capacity globally, additions to global refinery capacity are likely to contribute to changes in the global fuels market in 2023. Increasing refinery capacity is likely to increase fuel availability and reduce calls on U.S. refiners to export. The Al Zour refinery in Kuwait began operating the first of its three production trains late in 2022. The refinery plans to bring the other two trains on stream in the first half of 2023 to meet distillate demand in Europe after the European ban on seaborne petroleum product imports from Russia goes into effect in February, according to recent reporting by Bloomberg. Several other major refinery projects have also announced expected start dates in 2023. More global refining capacity in 2023 should increase the availability of petroleum products globally and contribute to relatively lower prices and margins for refined petroleum products such as gasoline and diesel.

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