(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chart 1: tmsnrt.rs/1Whzbmi
* Chart 2: tmsnrt.rs/1Whzeyi
* Chart 3: tmsnrt.rs/1WhzjSI
* Chart 4: tmsnrt.rs/1WhzgWW
By John Kemp
LONDON, Feb 12 (Reuters) - The prospect that U.S. oil refiners might respond to rising stockpiles of refined fuels and weakening margins by cutting the amount of crude they process has roiled oil markets in recent days.
There are already more than 500 million barrels of crude in storage at refineries, tank farms, pipelines and oilfields across the United States, an increase of 84 million barrels compared with 12 months ago.
In addition, there are another 836 million barrels of refined fuels and intermediate products being stored at refineries, tank farms, pipelines and terminals, an increase of 76 million barrels compared with 2015.
Crude stocks are at a record level and product stocks are nearly so, according to weekly reports from the U.S. Energy Information Administration (“Weekly Petroleum Status Report”, EIA, Feb. 10).
Anything that indicates refiners might be about to cut the amount of crude they process has the potential to have a big impact on both crude and products prices (“As U.S. refinery cuts quicken, crude market faces next threat”, Reuters, Feb. 12).
Over the last year, U.S. refineries have operated their distillation units at record rates to satisfy strong demand for gasoline.
Economic growth, job gains and lower oil prices combined to produce the strongest growth in gasoline consumption in more than a decade.
U.S. refiners reaped large profits by exploiting the difference between depressed crude prices and strong demand and high prices for gasoline.
The economics of every refinery are different, depending on the type of crude they are able to buy and the mix of fuels they can produce.
But one way to think about the gross margin refiners are able to achieve is to consider an illustrative refinery that processes three barrels of crude to produce two barrels of gasoline and one barrel of distillate fuel oil.
Between January and the middle of August 2015, the gross 3-2-1 cracking margin averaged $24 for every barrel of crude processed through a refinery.
In reality, refineries also have a range of costs from equipment and labour to inputs such as fuel, power and platinum catalysts.
Net margins once all these other capital and operating costs are taken into account were much narrower in most cases.
Nevertheless, gross and net refining margins in the first eight months or so of 2015 were some of the most attractive for a decade, and refiners responded by running their distillation units flat out.
Strong demand from drivers kept reported gasoline stocks in line with the long-term average especially when adjusted for the increase in consumption (tmsnrt.rs/1Whzbmi).
But the more sluggish demand for diesel resulted in a large build up in inventories of distillate fuel oil, which by the end of 2015 stood 27 million barrels, or 22 percent, higher than at the end of 2014.
Gross refining margins tumbled towards the end of the year, averaging just $14 between the middle of August and the end of December. By early February 2016, the 3-2-1 margin had dropped to just over $11 per barrel (tmsnrt.rs/1Whzeyi).
The stock of refined and partially refined products had risen by 76 million barrels, almost 10 percent, compared with February 2015.
Critically, from the end of December, the stock of gasoline and blending components also began to surge, reaching a record 256 million barrels in early February, an increase of 13 million barrels on February 2015.
Fuel consumption has been hit by a combination of factors, some of them likely to be very short-term while others could have a more prolonged impact.
Diesel demand has been hit by the worldwide slowdown in freight while El Nino has hit heating oil consumption.
El Nino is a cyclical phenomenon and its impact should fade by the middle of 2016.
The duration of the freight slowdown is more difficult to predict and depends on the performance of the U.S. and global economies as well as how quickly U.S. businesses clear the overhang of inventories.
Gasoline consumption, which had been growing much faster than distillates, slowed in the last three months of 2015 and then again in January 2016 (tmsnrt.rs/1WhzjSI).
Some of the most recent slowdown, however, is likely to have been due to the flooding that hit the Midwest at the start of January and the snow storm which hit the East Coast towards the end of the month.
Poor weather contributed to an unusually rapid build up in gasoline stocks during January which put gasoline prices under pressure.
The poor weather should have only a short-term impact. Gasoline consumption has already rebounded strongly in the most recent week.
U.S. refiners and blenders will exit winter with somewhat higher gasoline stocks than normal but it should be possible to clear the overhang by exploiting the normal flexibility within the system.
Many refineries take crude distillation towers and other refinery units offline between February and April for routine maintenance and upgrades during what is ordinarily the slowest time of the year for fuel demand.
Stocks of gasoline and other fuels typically fall during the maintenance period. By taking units offline earlier, keeping them out for longer, and bringing them back later, most refiners should be able to reduce inventories to target levels without too much disruption.
The consequence could be an additional build up in crude oil stocks but the increase would comparatively modest and should already be priced in by the market since it is reasonably foreseeable.
The biggest question facing refiners as well as traders is whether gasoline consumption will continue to grow rapidly in the rest of 2016 or show more modest gains (tmsnrt.rs/1WhzgWW).
Employment growth remains healthy and the low price of gasoline should continue to encourage motorists to use their cars more and buy vehicles with larger engines.
But the industrial side of the economy is struggling, many corporations report increased caution about investment, and financial markets have had a turbulent start of the year.
There are lingering questions about how much of the benefit from cheaper fuel prices has already filtered through into gasoline demand and how much is still left to come.
Gasoline consumption in the United States, India and China contributed most of the worldwide increase in fuel consumption last year.
So refiners and traders will continue watching anxiously for any clues about whether that strong consumption will be repeated or is about to succumb to a tougher economic environment.