Oil price unlikely to recover as Saudi refining hits market

Oil prices are unlikely to recover soon as Saudi Arabia's drive to boost its refining activities is expected to force refineries elsewhere to slow down their operations, thus creating an even bigger glut of unwanted crude oil.

Two big new refineries in Saudi Arabia are adding to growing supplies of diesel and jet fuel, which could mean other refiners will use less crude as they respond to the oversupply of oil products.

Oil prices currently near $50 a barrel are already under pressure, in part from an oversupply of fuels produced by refiners enjoying healthy margins from cheap crude as a result of the U.S. shale boom and record OPEC output.

A big difference now is that the world's largest oil exporter, Saudi Arabia, whose new refineries have added to a flood of the fuels now swamping global markets.

OPEC's biggest oil producer has long wanted to process more of its own crude. Earlier this year, its 400,000 barrel per day Yasref refinery reached full production. It joined the 400,000 bpd Jubail refinery, which hit full capacity late last year.

"All signals point to weaker margins, which mean lower runs," said Jonathan Leitch, research director with Wood Mackenzie. "You're going to start to get a surplus of crude again."

Storage tanks in Asia and Europe are filling up with diesel and jet fuel as growing consumption has failed to keep pace with increased production.

Soaring production of fuels in the United States and Europe has added to the overhang. Refineries there are still running hard to supply drivers, particularly in India and the United States, with the gasoline they are consuming at breakneck pace due in part to the halving of oil prices over the past year.

CHINA SLOWDOWN

But slower economic growth in China has hit diesel demand growth, which relies primarily on industrial activity such as construction.

European demand growth has not been nearly enough to absorb the barrels now arriving from the United States, Asia and the Middle East.

"Storage will reach capacity," one European distillates trader said, adding that an extremely cold winter, or heavy schedule of refinery maintenance work, would be the only salvation for diesel's profitability.

Product stocks, including jet fuel and diesel, in independently held storage in the Amsterdam-Rotterdam-Antwerp area hit an all time high last week, while such stocks in Singapore were near a four-year high. At least one Asian storage operator reported a rise in enquiries about leasing new capacity.

That leaves limited hope for the margins of European, American and Asian refineries which produce these fuels; profits for producing them have already fallen to five-year lows in Asia. This has put refineries' demand for crude oil in question.

Margins are unlikely to improve any time soon unless refineries start to make deeper cuts in production, one Singapore-based trader said. "The supply is so much now that even marginal run cuts are not going to help."

Distillate stocks in the United States also rose faster than expected last week.

While booming demand from gasoline spurred refineries to consume ever more crude oil, traders and analysts said this incentive will subside when drivers' demand for gasoline falls in the autumn and winter.

And if U.S. and European refiners cannot count on distillates to help them make money, their appetite for crude oil could slow, as has already happened to their Asian counterparts.

"I think the runs have probably hit their peak for the year," Leitch said.