Growing gasoline, diesel glut sparks sharp sell-off in global oil markets

By Ron Bousso and Libby George

LONDON, May 9 (Reuters) -- A growing overhang of gasoline and diesel fueled a sharp sell-off in oil futures on Monday that reversed a recent rally over the wildfires in the heart of Canada's oil sands region, traders and analysts said.

The sell-off came amid warnings that supplies could outpace global demand even during the peak summer driving season that traditionally kicks in at the end of May.

While crude oil supplies have significantly tightened in recent weeks due to outages linked to unrest in Libya, militant attacks in Nigeria, the fire in Canada and gradually slowing US shale production, refineries have continued to run at full throttle in anticipation of rising demand.

But refining profit margins, known as cracks, are coming under heavy pressure as storage tanks brim and more plants return from maintenance or outages, such as ExxonMobil's 149,500-bpd refinery in Torrance, California.

"Stocks are quite high, and they've got all these refineries coming back in the States," said Steve Sawyer, head of refining at consultancy Facts Global Energy. "The news that these refineries were coming back put pressure on the cracks."

Sawyer said some 400,000 to 440,000 bpd of refinery capacity had been offline in April, but was now restarting, pouring more oil products into the market.

Benchmark US gasoline refining margins fell by as much as 4.3% on Monday, sinking by more than 30% below their five-year average of $25.22/bbl. That followed a surprise build in US gasoline stocks last week, as more tankers laden with the driving fuel head to the New York Harbor pricing hub.

European low-sulfur gasoil futures were also down by nearly 5% as more tankers headed to the region from Asia, the Middle East, Russia and the US despite storage levels in the region hitting near maximum.

Brent crude oil, the most closely watched oil futures, were also down by nearly 4%.

Refining profits could come under further pressure with the tightening of the crude market, said Robert Campbell, head of oil products research at consultancy Energy Aspects.

"With the crude oil market slowly tightening, we expect refined products cracks to be under gradual pressure since crude sellers will start to regain pricing power over refiners."

In a further sign of the growing overhang of supplies, Brazil has joined a list of countries exporting diesel to Europe, reversing a traditional route and underscoring a weakening of the largest South American economy.

In the United States, distillates stocks, which include diesel and heating oil, reached their highest seasonally since 2010, the Energy Information Administration (EIA) said.