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Refinery Inputs Have Declined, but What Does that Really Mean?

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Jan. 22 2016, Updated 5:00 p.m. ET

Measuring refinery inputs

In its weekly report released on January 21, the EIA (US Energy Information Administration) reported that US crude oil refinery inputs averaged 16.2 MMbpd (million barrels per day) during the week ending January 15, 2016. This represents a decrease of 233,000 bpd (barrels per day) over the prior week’s average refinery inputs.

Compared to the same period last year, current refinery input levels are ~0.8% higher. The four-week average refinery input of 16.478 MMbpd to January 15 was 0.3% more than last year’s levels of ~15.900 MMbpd.

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Refinery utilization rate

This fall in refinery inputs pushed the refinery utilization rate of 91.2% for the week ending January 8, 2015, to 90.6% for the week ending January 15, 2016.

Why are refinery inputs falling?

The surprise crude oil and gasoline inventory build up over the past two weeks have dragged crude oil prices down to the floor. Crude oil prices fell more than 20% in 2016, and falls in crude oil prices increase the margins of refineries because refineries produce more when prices fall. But the scenario has been reversed now, as refineries have been decreasing their input, because lower gasoline and distillate demand has been pushing inventory levels high.

Why watch refinery inputs?

The refinery inputs represent the crude oil demand and also indicate changes in gasoline and distillate production levels, so any change in refinery inputs should reflect the inventory levels of crude oil, gasoline, and distillates because refinery inputs are key for energy investments.

A fall in refinery input will also likely put more pressure on crude oil producers such as Anadarko Petroleum (APC) due to lower demand, and refineries such as Marathon Petroleum (MPC), Valero Energy Corporation (VLO), and Western Refining (WNR). MLPs (master limited partnerships) like Calumet Specialty Products Partners (CLMT) and CVR Refining (CVRR) also tend to feel the heat in an environment of lower production and transport volumes.

MPC and VLO collectively account for 5.5% of the Energy Select SPDR ETF (XLE).

Continue reading this series for more analysis of current gasoline inventories.

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