The U.S. has operated its refineries at near-maximum capacity for over a quarter of a century. Refineries are scrambling to take advantage of the windfall profits created by the Iran War. History offers a warning: "Super-refining" runs can lead to major plant failures. This has global consequences. ?U.S. The ability of refineries to maintain today's high operating rates for several months or even years could be the difference between a tight global fuel supply market and a full blown crisis marked by severe shortages,?demand disruption and widespread economic pain. U.S. and Israeli air campaigns against Iran triggered the Strait of Hormuz closure in late February, disrupting a quarter of global oil'supply', and severely hampering refinery operations, especially in Asia. In July, Moscow suspended diesel exports due to the relentless Ukrainian attacks against Russian refineries. Global fuel production has collapsed as a result. According to the International Energy Agency, global refinery output in July was 81 million barrels a day (bpd), or nearly 5 million bpd (or about 6%) below what it was at this time last year. According to the U.S. Energy Information Administration, the U.S. is the second largest refiner in the world after China and the largest crude producer. The U.S. responded by increasing crude, gasoline and diesel exports to record levels. The past six months were a bonanza for the U.S. refinery industry. Benchmark margins Since the beginning of the war, the average price for converting crude oil into transportation fuels has been more than $50 per barrel. This is more than twice the 10-year average. Due to this, U.S. major refiners such as Valero Phillips 66 Marathon Petroleum, Exxon Mobil and Exxon Mobil reported record or nearly-record earnings in the second quarter.

Many companies ran their plants at maximum capacity to generate these bumper profits. Since the beginning of the conflict in Iraq, U.S. refinery output has been around 17 million barrels per day (bpd), significantly higher than its five-year norm.

How long can this last?

Party Like It's 1997

This sustained period of maximum production is unprecedented in modern history. In the last 11 weeks, U.S. refining rates have been above 95% - a level that has not been seen for more than 25 year. According to EIA data dating back to 1990, the refineries only reached such high rates three times. In 1997 and 1998 U.S. refineries achieved two separate 24-week periods of above 95% utilisation. The first occurred between May and Oct 1997, and the second occurred between April and Sept 1998. The summer of 1998 was the first time that the EIA had ever recorded a refinery fleet exceeding 100% utilization.

This extraordinary performance was a result of a rare combination between low crude oil prices and a consistently high?fuel demand. Refiners were therefore compelled to run their operations at full capacity. In 2000, refineries were operating at 95% for 13 weeks in a row, but conditions were very different. In 1999, the Organization of Petroleum Exporting Countries introduced production cuts that led to a nearly two-fold increase in crude prices by mid 2000. This squeezed the profit margins of refineries, but coincided with the beginning stages of the commodities super-cycle driven by China, which saw global fuel demand soar, forcing refineries into high gear to meet this demand. The rally ended when crude oil became too expensive for such high operating rates.

The current situation is quite different to any of the precedents. The current surge in utilisation is not due to cheap feedstocks or a runaway market, but rather a severe lack of refining capacities caused by the war damage in Iran and Russia. These episodes show the risks that refiners take.

A DANGEROUS PRECIPE

The risk of equipment failure, accidents and unplanned shutdowns increases when complex refining system are run at high speeds over a long period. Many U.S. refiners, faced with soaring profits and a global shortage of fuel, have delayed essential maintenance that was originally scheduled for the 2nd quarter. This has pushed much of the work to late 2026 or 2027. This could lead to unplanned, sharp capacity losses.

The lessons of history are mixed. The first super-refining event in 1997 was resolved relatively slowly, with the utilisation dropping from 95% at mid-October down to 92% one month later before rapidly rebounding. In the year following, it became clear. The following year, after a 24-week run of full capacity in 1998 the utilisation dropped from 95% late September to 86% mid-October.

In 2018, a similar pattern emerged, where an eight-week period with utilisation levels above 95% was quickly followed by a drop to 89% in merely 1-2 weeks.

The rally of 2000 was notable for its lack of a similar collapse.

What's the chance of a failure this time around?

The industry has today a much better understanding of the risks that are associated with periods of high usage.

The global refining crises of today is unlike any other that refiners have faced before. Fuel inventories are dwindling, and severe damage to the refining infrastructure of the Middle East?and Russia will likely leave the world with a reduced processing capacity for many years. According to the IEA, the risk of further capacity loss is higher than ever before because global refining production is 2 million bpd less than demand.

This creates a potentially dangerous situation. The higher the margins on refining, the greater the temptation to run at full speed. The more they run, the higher the risk that failures will occur and remove fuel from a market already overstretched.

Now, America's refining companies are the world's last-resort supplier. It is a danger that the world has grown so dependent on their refineries that a minor disruption in their operations can tip a fragile market into an actual fuel crisis.

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(source: Reuters)