The United States has so much excess oil -- a product of booming production from the nation's shale formations -- that it is running out of places to store it.
But before storage tanks begin to spill over, relief is on the way as refiners are set to churn out record amounts of gasoline this year, turning the oil surplus into a gasoline glut.
"I think of it as oil is on sale," said Andrew Lipow, president of Lipow Oil Associates LLC in Houston. "Refiners who are coming out of their maintenance season are going to increase their runs to historical high levels."
The prospect of a gasoline glut is further good news for consumers who already this year have been experiencing some of the cheapest pump prices in years as a result of the oversupplied oil market, analysts said.
U.S. oil inventories are at their heights levels in more than 80 years, and are continuing to grow despite a recent pullback in drilling by energy producers.
"What we are seeing is spectacular success of the oil shale revolution adding supply in North America at the same time OPEC has decided not to cut production and continue to compete with market share," Lipow said.
As a result of the U.S. shale boom, energy companies have been pumping out record amounts of crude from shale formations, primarily contributing to the global oil glut.
Since mid-2014, crude prices have plunged more than 50 percent as the global market became oversupplied with oil and demand waned with a weakening economy, particularly in Europe and Asia.
The glut was further exacerbated on Thanksgiving Day when the Organization of the Petroleum Exporting Countries decided to retain its production levels.
The move by the cartel to continue its oil output was made to preserve its share of the market and curtail production from U.S. shale plays, analysts said, adding that OPEC is not expected to make a production cut during its meeting this summer.
In response to the price drop, energy companies have been cutting their 2015 capital spending plans and idling rigs.
Companies idled 42 oil rigs, dropping the nationwide rig count to 760, Baker Hughes, an oil-field service company, reported Friday. A year ago there were 1,517 rigs drilling for oil.
So far, that hasn't stopped production growth.
U.S. crude inventories recently hit another weekly record, gaining 10.9 million barrels in the period ending April 3.
This places U.S. oil stocks at 482.4 million barrels, up from 384.1 million during the same week in 2014, according to a report by the U.S. Energy Information Administration.
Because of the delay between rig activity and well production, U.S. oil production will likely peak in April and then decline until August, according to a report released last week by Goldman Sachs analysts.
While the risk of running out of space to store crude is a "low probability event, it cannot be ruled out," said the report.
To tackle the surplus in crude supplies, refineries are going to make gasoline at record pace, analysts said.
Refineries, which are enjoying some of the healthiest margins in years, are finishing up seasonal spring maintenance at their plants. During the period, they switch from processing winter-blend fuel to summer blends, which burn cleaner and are more expensive to refine.
The report by Goldman Sachs also said that "refinery runs will ramp up strongly in coming weeks." The bank said it expects refinery runs to reach 16.1 million barrels per day in April, up 250,000 barrels per day a year ago.
Asked whether its refinery in El Dorado would increase the amount of crude it processes in response to the increase in oil supplies, Delek U.S. Holdings spokesman Keith Johnson said, "We try to run our operations efficiently as we can throughout the year." Delek has the capacity to process 80,000 barrels of crude per day.
In early 2014, the refinery, which is operated by Lion Oil Co., was upgraded so it could process not just the medium grade crude it was already handling but also lighter grades from U.S. shale plays.
"Overall the goal is to give it more flexibility to adjust based on the economics it's seeing on either crude," Johnson said.
The refinery receives oil from the Permian Basin in Texas and heavy Canadian crude by rail, he said.
Ahead of summer, refineries also will increase output to meet consumer demand, which likely will increase to the highest levels since 2007 as a result of lower prices, said Tom Kloza, chief oil analyst for gasbuddy.com, a price-tracking website.
"We've got so much inventory of crude oil," Kloza said. "There's certainly motivation to produce a lot of gasoline now."
As a result of higher refinery runs, gasoline production is projected to increase by more 100,000 barrels per day than last summer.
Gasoline consumption for driving will average 9.2 million barrels per day this summer, a 1.6 percent increase from last year, according to the energy administration.
"Motor vehicle is going to continue to be the most economical form of travel mode," said Mike Right, spokesman for AAA. "People are going to have a little more money to spend,as well."
Because of this and lower crude prices, U.S. retail gasoline prices will average $2.45 a gallon between April and September, down from $3.59 a year ago, according to a report released by the agency last week.
In Arkansas, gasoline prices averaged $2.19 a gallon on Thursday, according to AAA's fuel gauge report.
Barring unexpected refinery outages, gasoline prices should stay at least $1 per gallon cheaper than they were last year, analysts said.
"It's going to be a cheap year," Kloza said.
SundayMonday Business on 04/13/2015
Print Headline: Tanks full of oil, U.S. refineries to pump out cheap summer gas