FT Alphaville " A renaissance in OECD refining The IEA" September Oil Market report paints an interesting picture of developments in the global refining industry. In short, having restructured intensively over the past few years - by closing off a lot of unprofitable capacity - the industry is now in a position to respond to the product tightness it itself created (as a result of its restructuring). Which is important because product tightness persists despite an overhang of crude in many regions. As the IEA notes: Given wide disparities in OECD stocks between regions and products, whether reported inventories look tight or comfortable may depend on one's point of view. An apparent overhang in US crude stocks offered meager protection against supply disruptions when those stocks were landlocked and not easily accessed by the market. High OECD crude stocks in recent months have hidden uncomfortably tight product inventories, notably for middle distillates. Conversely, the latest crude stock draws may not be as alarming as they appear, inasmuch as they reflect an unsung renaissance in OECD refining. Emerging from protracted rationalization, OECD refiners have responded to this summer's high margins and low product stocks with a vengeance. The transatlantic clean tanker trade, long depressed, is reviving as products are rushed to premium markets. For consumers, relief may be on the horizon. One other observation is that the industry's restructuring has seen many small facilities serving dedicated markets replaced by large, low-cost, cutting-edge, export-driven plants in centres stretching from the US Gulf Coast to India, to the Middle East. The IEA believes the development has beefed up global inter-dependence in product supply. On the one hand, this is good news because it brings a certain amount of flexibility to the market. The downside, however, is that the new market structure also adds to volatility, according to the IEA. But that, we suppose, is to be expected as supply chains get leaner and more efficient. The important point the IEA is making is that much of the product tightness we have witnessed of late is self-constructed - the result of intensive industry restructuring. It's for this reason that additional crude supplies have not been effective at easing prices. Indeed, as Reuters" Robert Campbell has noted, adding crude supplies when refiners are not ready to build up product inventories is akin to pushing on a string. The exciting thing is that we may now be at a key inflection point. As the IEA notes, it's no longer the case that refiners are having to hold back capacity to boost margins. If anything, they're responding to market tightness with renewed vigor. What's more, it's no longer over-capacity that plagues them, but a lack of slack in the system to cover things like unexpected capacity outages. Related links: An oil forecasting tool that's acting up - FT Alphaville The oil-bound - FT Alphaville SPR talk as QE3 expectation management - FT Alphaville QE exit-inflation paradox - FT Aphaville The SPQR - FT Alphaville This entry was posted by Izabella Kaminska on Wednesday, September 12th, 2012 at 10:41 and is filed under Capital markets, Commodities. Tagged with crude, iea, oil, refining.