(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2e1dCXZ
* Chart 2: tmsnrt.rs/2e1eUCo
* Chart 3: tmsnrt.rs/2e1eJ9Z
* Chart 4: tmsnrt.rs/2dRu0Mq
* Chart 5: tmsnrt.rs/2dRs7z4
* Chart 6: tmsnrt.rs/2dRuLVu
By John Kemp
LONDON, Oct 12 U.S. gasoline stocks remain at
record levels for the time of year but once they have been
adjusted for record fuel consumption by U.S. motorists do not
The gasoline glut, which dominated discussions about the
outlook for crude and fuel markets during the spring and early
summer, quietly evaporated during August and September.
U.S. gasoline stockpiles are now just 3.5 million barrels
(1.6 percent) higher than at the same point in 2015 according to
data from the Energy Information Administration (tmsnrt.rs/2e1dCXZ).
Back in July, the stockpile surplus over 2015 peaked at more
than 25 million barrels (12 percent), triggering talk about the
need for voluntary run cuts by U.S. refineries in the second
half of the year.
In turn, the prospect of lower crude processing rates
weighed on oil prices during August and September, helping send
prices sharply lower until OPEC reached a surprise production
deal at the end of September.
Where did the excess gasoline go? And how did refiners
manage to eliminate the surplus without major disruption?
A big part of the answer lies in the record or near-record
consumption of gasoline over the summer which helped create a
consistent draw on inventories (tmsnrt.rs/2e1eUCo).
In the face of record demand, refineries generally limited
processing rates to at or below levels reported in 2015 to
reduce stocks (tmsnrt.rs/2e1eJ9Z).
Limiting throughput in the face of strong demand played a
key role in rebalancing the gasoline market but other
adjustments also contributed.
U.S. refiners exported unusually large volumes of finished
motor gasoline and blending components to countries in Latin
America hit by local refinery problems.
U.S. refiners also exploited the flexibility in their
processing operations to curb production of gasoline and
maximise output of middle distillates like diesel and especially
At a first approximation, refineries produce roughly fixed
proportions of the major fuels like gasoline, jet fuel,
distillate fuel oil and residual fuel oil.
But there is some flexibility to shift yields especially
between gasoline on the one hand and jet fuel and distillate
fuel oil on the other.
In particular, refineries can switch production between the
heaviest components of gasoline and the lightest components of
jet fuel and distillate fuel oil by changing cut points and
The capacity to switch is termed the "swing cut" and is part
of what makes fluid catalytic cracking units so important for
Over the summer, U.S. refineries focused on producing more
distillate and jet at the expense of slightly lower yields of
Refineries cut their gasoline yield by more than 4
percentage points from 49.9 percent in January to 45.8 percent
Gasoline yields normally decline between January and July
but the decline this year was the largest for eight years (tmsnrt.rs/2dRu0Mq).
At the same time, refineries ramped up the production of
middle distillates and especially jet fuel to an unusual degree.
Refinery yields of jet hit 10.0 percent in July 2016
compared with 9.6 percent in July 2015 and a 10-yr average of
9.5 percent (tmsnrt.rs/2dRs7z4).
Refiners' yield of jet in July was the highest since 2008.
Production hit a record 1.729 million barrels per day, an
increase of 59,000 barrels per day compared with 2015.
Valero, the largest independent refiner in the United
States, told analysts during its second quarter conference call
in July "we are currently in max-jet mode", which is consistent
with the industry-wide yield statistics.
Record gasoline consumption. Restricted refinery throughput.
Strong exports. Switching to jet. None of these factors would
have been enough to clear the gasoline glut on its own.
But in combination these factors have proved enough to draw
down excess gasoline and leave the market looking more balanced.
Hedge funds and other money managers have taken note and
shifted from a bearish to a bullish position on U.S. gasoline
Hedge funds have switched from a rare net short position in
gasoline futures and options of 5 million barrels at the end of
July to a net long position of 31 million barrels by the start
of October (tmsnrt.rs/2dRuLVu).
(Editing by Elaine Hardcastle)