Keep an Eye on Refinery Utilization

Keep an Eye on Refinery Utilization

If you're trading crude oil short term and you don't watch refinery utilization, you should.

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Every week like clockwork, The U.S. Energy Information Administration (EIA) puts out the Weekly Petroleum Status Report. The two main parts of this report watched by retail traders are the change in U.S. crude stockpiles (excluding the Strategic Petroleum Reserves) and the change in gasoline reserves and that’s a good start. The level of builds or draws from those two very important storage stockpiles move markets, especially if it’s a surprise, but there is another component to the report that is ignored but can be used as a guide to those changes. The Refinery Utilization number (RU) can help a trader look out a week or two and anticipate whether we are going to see a build in crude stockpiles or a crude draw.

 

RU

Refineries are the first point of demand for crude oil. There is relatively no demand for raw barrels of crude oil, most of the demand is for refined products. RU tell us how much of the U.S. refinery capacity is currently being used.  By default, that makes it a proxy for crude oil demand. When the refineries are running full out, at 95-97% of full capacity, stockpiles are being drawn down and it’s hard for drillers to keep up. Prices therefore rise, and the reverse is true when RU is low or falling, prices tend to follow with a bit of a lag. You can see the relationship clearly in the chart where RU is overlaid (with a bit of an offset) with CL’s ​price.

 

(Chart is through 3/04/2019)

There are 2 caveats to this theory. One is during the "turnaround", which is when refineries are shutting down parts of their operations to retool for summer or winter blend gasoline, and during geopolitical price moves. But a look at the chart in this piece speaks volumes. All else equal, RU can help speculators choose a direction. 

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