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Vicious Circle: Gasoline and Diesel Prices Impact Refinery Demand

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Gasoline and diesel prices 

Crude oil prices are the input costs to crude oil refineries. Historically low oil prices would boost refinery demand. This would lead to massive production and gasoline stocks, as we covered previously in this series. The hunger for more profit motivated refiners like USA Energy (ALJ), HollyFrontier (HFC), Phillips 66 (PSX), Marathon Petroleum (MPC), Sunoco (SUN), and Western Refining (WNR) to produce more refined products. This led to the glut in refined products. Gasoline and diesel prices fell to record lows.

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Refinery demand in the US 

Lower refined products prices led to the fall in refinery demand. The U.S. Energy Information administration reported that US refined demand fell to 15.5 MMbpd (million barrels per day) for the week ending February 5, 2016—compared to 15.7 MMbpd for the week ending January 29, 2016. Refinery demand peaked at 16.6 MMbpd in early January 2016. The refinery demand in the Gulf Coast region is expected to fall the most—as shown in the following chart.

US refineries’ strategy 

Refined products’ lowest prices since 2003 motivated oil refiners to curb production. Oil refineries like Valero Energy (VLO) and PBF Energy (PBF) reduced their refinery production activities at plants in Tennessee, Ohio, and Texas. Curbing the oil refinery activity means a rise in crude oil stocks. To learn more, read Crude Oil Storage Costs Rose 9 Times, US Crude Tests New Limits. Oil refiners outperformed downstream oil companies like Marathon Oil (MRO), Apache (APA), and Energen (EGN) during the oil market collapse since June 2014. However, the golden days are over for oil refiners. The oil industry is in a vicious circle where lower oil prices led to lower gasoline prices. This seems to be the boon for midstream oil companies. Data compiled by Bloomberg suggest that 11 independent refining companies have lost more than 37% since December 4, 2015. These oil refiners gained by 230% in the last five years. Read how oil prices impacted drillers, oil equipment companies, and US oil productivity in the next two parts of the series.

ETFs 

Volatility in the oil market impacted ETFs like the VanEck Vectors Global Oil Refiners Index (CRAK), the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the First Trust Energy AlphaDEX Fund (FXN), the Direxion Daily Energy Bull 3x (ERX), and the Vanguard Energy ETF (VDE).

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