Deep US refinery maintenance seen easing in second quarter-IIR

NEW YORK: The amount of US oil refinery capacity in maintenance should decline by almost 50 percent in the second quarter compared with the first three months of this year, according to data from consultancy IIR Energy, boosting output of diesel and gasoline after an intense work schedule so far in 2013.

IIR Energy sees an average of 676,000 barrels per day (bpd) of refining capacity being lost to maintenance work in the second quarter, above the five-year average for this time of year but a significant reduction from the 1.13 million barrels it estimates was down in the first quarter.

Midwest maintenance will take 408,000 bpd out of capacity, IIR Energy said, more than doubling a previous estimate reported by Reuters on Jan. 18 for the second quarter largely because work at BP's 405,000 bpd Whiting, Indiana, refinery has been extended into the summer.

The Whiting refinery is undergoing a $4 billion upgrade that will substantially increase its ability to process Canadian heavy crude. The plant's largest crude distillation unit has been shut down since November as part of the project.

"Planned turnaround should go down sharply," said Mike Wittner, Head of Commodities Research, Americas, at Societe Generale.

"Starting in April, month-on-month declines look to me pretty sharp and steady. This is extremely seasonal and fits the pattern," he said.

Refinery maintenance in the first quarter will peak around 2.2 million barrels per day in March, IIR Energy said.

Refineries with access to crude in the Midwest have enjoyed greatly improved margins in recent years with the boon of cheap domestic oil from shale formations such as the Bakken in North Dakota.

To reap the most profits, they have kept plants running as long as possible without interruptions for repairs, but this year they cannot avoid it. The first quarter average maintenance level of 1.13 million bpd is far higher than the 780,000 bpd that is the norm over the last five years, according to IIR Energy.

IIR Energy specializes in supply-side research into energy assets and plants and is a division of Industrial Info Resources (IIR) which conducts research into project and plant spending. Most refineries do not disclose their maintenance schedule.

CRACKS UNDER PRESSURE

The growth in new crude supplies has outpaced the US oil sector's ability to build the infrastructure needed to move the oil to coastal refining centers. Inventories at the Cushing, Oklahoma, delivery point for US oil futures have swelled to record highs this year, lowering the value of the crude relative to international prices.

US crude oil prices are now around $20 cheaper than international benchmark Brent crude, overturning a decades-old trend of West Texas Intermediate trading at a premium to Brent.

High levels of maintenance at refineries naturally weigh further on crude prices by reducing demand.

"The Whiting refinery, where maintenance has been delayed a little bit, will definitely keep more capacity off line in Padd II than was originally expected," said Chris Barber, Oil Market Analyst with Energy Security Analysis Inc (ESAI).

"All things being equal, with a part of that refinery down, this can be more bearish on crude as you get closer to May, when gas demand starts to pick up," he said.

But other analysts noted that a more significant negative impact on US crude from the BP project will come once all units are fully functioning, because that is when the refinery will switch the majority of its feed stock - 350,000 barrels out of a capacity of 405,000 barrels - to Canadian crude.

The significantly lower expected maintenance levels in the second quarter, as compared to the first, should be bearish for gasoline and diesel prices, although there are several other factors at play, analysts said.

"In an environment where products stocks have been built up and we would see refinery runs at high rates, and given that maintenance isn't as large as expected, I wouldn't really see huge upward momentum for product cracks in the second quarter," said Miswin Mahesh, analyst at Barclays Capital in London.

Societe Generale's Wittner said gasoline and diesel differentials to their respective futures contracts should be under downward pressure in the second quarter due to the lower maintenance level.

But he also noted maintenance was not always so significant a factor in product prices, especially at a time when refinery run levels are not maxed out and in the three months of the year that precede the typical boom in demand during the summer.

US refinery runs have varied at between 84 and 89 percent, according to weekly data from the US Energy Information Administration. When run levels are below maximum, plants can ramp up production to compensate for others that are offline.