Key Takeaways
U.S. refiners are running at full capacity to meet domestic and international demand, as the ongoing conflict over Iran and reduced energy flows through the Strait of Hormuz throttle back supplies.
Asian refiners who have been expanding capacity are unable to secure their normal feedstock supplies, and California is becoming increasingly dependent on Asian imports of finished products as refineries in the state close.
Refiners running at near 95% of capacity are postponing typical spring maintenance, usually associated with the transition to summer blends.
Diesel and gasoline margins are expected to be $50 and $22 per barrel, respectively, in the fourth quarter of this year.
While some companies have added capacity to existing refineries to make up for some of the 1.1 million barrels per day of refining capacity lost during the COVID lockdowns, California’s continued exodus of refining capacity is adding strain to the system and increasing costs for motorists.
U.S. oil refiners are running plants close to 95% utilization and deferring some maintenance to take advantage of strong domestic and international demand and high margins. Refinery shutdowns averaged 470,000 barrels per day from January to May, down from 700,000 a year earlier and 900,000 in 2024, with little maintenance scheduled for the second half. U.S. refiners usually shut down for maintenance in early spring to get ready for the summer driving season. Goldman Sachs expects global refinery utilization to approach an all-time high by year-end, with diesel and gasoline margins at $50 and $22 per barrel, respectively, in the fourth quarter. The longer refiners postpone maintenance while operating near full capacity, however, the greater the risk of unexpected breakdowns that can force units offline.
The Iran conflict and the effective closure of the Strait of Hormuz continue to disrupt global energy flows, prompting countries to turn to the United States for oil and petroleum products. Asian refiners cannot get the oil they need to produce their own petroleum fuels and are looking to import U.S. diesel and jet fuel, as is the case in Europe. With the U.S. summer driving season getting under way and gasoline stockpiles at multi-year seasonal lows, domestic refinery demand also will be heating up.
The United States has 132 refineries that can process 18.4 million barrels per day. The United States lost about 1.1 million barrels of daily refining capacity between 2020 and 2021, accounting for about one-third of global capacity losses during this period due to reduced demand resulting from the COVID pandemic and the resulting lock downs. Since then, some existing refineries expanded their processing capability.
ExxonMobil increased its Beaumont, Texas refinery’s capacity from 369,000 to 609,000 barrels per day at a cost of $2 billion, adding a distillation unit in 2023. Chevron invested $475 million to modernize its Pasadena, Texas, refinery in 2024, increasing its light crude processing capacity by almost 15% to 125,000 barrels a day. And, Marathon’s Galveston Bay refinery upped its capacity by 6% to 631,000 barrels per day, making it the nation’s second largest refinery behind Motiva’s Port Arthur facility that has a capacity of over 640,000 barrels per day.
Companies are choosing to upgrade their existing facilities rather than build new refineries mainly due to the onerous regulatory process. However, there has been a recent exception. America First Refining is building a 168,000-barrel-per-day refinery in Brownsville, Texas, a deep-water port with direct rail and sea access, supported by investment from India’s Reliance Industries. The facility — the first new major U.S. refinery project in roughly 50 years — will operate on light shale oil. Many Gulf Coast refineries are unable to process light, sweet oil from shale fields because they were configured in the last 40 years to run on lower-cost heavy, sour oil, which has a higher density. U.S. light oil resources were on the decline before hydraulic fracking and directional drilling brought an explosion in production. Heavy oil imports are readily available from U.S. neighbors, Canada and Mexico, and now also Venezuela.
California Shedding Refineries
Within the past nine months, California lost two refineries due to its onerous policies against oil and gas production. The Phillips 66 Los Angeles facility and the Valero Benicia Refinery closed due to stringent environmental regulations that increased operational costs, removing 17.5% of the state’s refining capacity. California now has only seven major refineries left and has to rely on more product imports, mostly from Asia. Because of the closure of the Strait of Hormuz those exports are increasingly scarce, however, forcing California to purchase fuel from refineries on the U.S. Gulf coast and to use President Trump’s waiver of the Jones Act for deliveries. Before the waiver, the state would send its product imports east to the Bahamas and then ship them to the California coast to avoid the higher costs of using U.S. ships manned by U.S. crews required by the Jones Act.
California is again making changes to its “cap-and-invest” program which could make it harder to meet and increase costs of refined products. Companies that are forced to participate in the program must either reduce their carbon emissions below a certain state-mandated limit or buy allowances from the market to offset emissions in excess of that limit. The state then “invests” in energy projects its leaders prefer under the justification of climate policy. The number of allowances available for purchase declines over time, making it harder to meet the cap and making it more expensive to do so. As the supply of available allowances falls, the price of each allowance, and the cost of compliance, rises.
The Western States Petroleum Association, a trade group, and Chevron, the state’s largest oil refiner, warned that unless the program’s emissions limits were loosened, companies could be forced to close additional refineries. The California Air Resources Board (CARB) voted to give up as much as $4 billion worth of free allowances to oil refiners and other industrial companies to help them comply with greenhouse gas limits imposed by the state’s cap-and-invest program. The plan would remove the 118 million metric tons’ worth of allowances from circulation, allowing companies to claim them for free, rather than be forced to purchase them.
Analysis
U.S. refineries are running all out to fill both domestic and international demands, many are delaying spring maintenance which normally occurs before the summer driving season. The U.S. refinery utilization rate is near 95% and diesel and gasoline margins are expected to be at $50 and $22 per barrel, respectively, in the fourth quarter. Some companies have added capacity to existing refineries to make up for some of the 1.1 million barrels per day of refining capacity lost during the COVID lockdowns. One new refinery is being built in Texas that will use light oil from shale basins rather than heavy oil that most U.S. refineries currently use. Due to its onerous regulatory program, California recently lost two refineries, forcing it to import more petroleum products.
