Refiners in U.S. Run Record Crude as Plants Cash in on Cheap Oil

Jul 16, 2014 1:26 pm ET

July 16 (Bloomberg) -- U.S. refineries processed a record volume of oil last week as plants in the Midwest raised operating rates to take advantage of widening discounts for domestic crudes.

Refinery runs climbed to 16.6 million barrels a day, the most in weekly Energy Information Administration data going back to 1989, and plants operated at 93.8 percent of capacity, the highest level since August 2005. Crude demand surged 5.4 percent in the Midwest, where fuel producers are enjoying record seasonal discounts for Canadian and domestic crudes versus U.S. benchmark West Texas Intermediate.

Hydraulic fracturing and horizontal drilling are helping to draw record volumes of crude out of shale formations across the middle of the country, giving U.S. fuel producers an edge over their peers abroad. The tight-oil boom has boosted domestic production to the highest level in more than a quarter-century.

“Refiners in the Midcontinent are benefiting from very inexpensive, cheaper crude, which of course is translating into higher runs,” Andy Lipow, an oil industry consultant with Lipow Oil Associates LLC, said by telephone from Houston today. “Margins have been good, and we’re finally at a rare period where all refineries are operating well.”

Western Canada Select, a heavy, sour blended crude, was unchanged versus WTI at a $23 a barrel discount as of 1:10 p.m., its lowest level for this time of year since at least 2008, data compiled by Bloomberg show. Oil from North Dakota’s booming Bakken shale formation weakened by 55 cents to $7.75 a barrel.

Plant Capacities

Crude rates at refineries in the western U.S. jumped 8.4 percent last week after plants including ones operated by Tesoro Corp. and Exxon Mobil Corp. finished unit repairs.

“Whatever the incentives were in each region, the refiners really increased their capacity,” Robert Merriam, manager of petroleum supply statistics at EIA, the Energy Department’s statistical arm, said by telephone from Washington. “If it all hits in one week, it’s going to push us to record levels. And that’s what we’ve got.”

Midwest refineries ran at a record 100.3 percent of operable capacity, EIA data show. The agency’s capacity total accounts for anticipated shutdowns and normal operating conditions, so rates can actually rise above 100 percent when plants are running optimally, Merriam said.

“You’ve got to look at the cracks and crude differentials, and that’s how you end up at 100.3 percent,” he said. “In a short period of time, if they’re not taking a refinery down, they can easily exceed that calendar-day capacity, and that’s what many of them decided to do in that region for this particular week.”