Gas prices are not priority for refineries

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NEW YORK (CNNMoney.com) -- Oil refineries are ramping up production, but they are focused on making heating oil and diesel fuel, not gasoline - as a result, summer drives may not get any cheaper.

U.S. light crude for June delivery on the New York Mercantile Exchange was down $1.20 at $124.60 a barrel at 1:38 p.m. ET. Oil had traded down $1.34 just prior to the 10:30 a.m. release of a weekly report on supply and demand.

In its weekly inventory report, the Energy Information Administration said crude supplies increased by 200,000 barrels in the week ended May 9. Analysts were looking for a rise of 2.5 million barrels of crude oil, according to according to a survey from Platts, an energy research firm.

While crude oil stockpiles increased only very modestly, Stephen Schork, publisher of the industry newsletter The Schork Report, says that it is important to remember that crude supplies were up a lot last week.

At 325.8 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year.

Crude rose as high as a record $126.98 a barrel in midday electronic trading on Tuesday, before retreating. In the past 12 months, crude oil has doubled in price.

Refineries are making more product, according to the government report, but they are making more distillates than gasoline, and that is not good news for the U.S. consumer. Distillates are used to make heating oil and diesel fuel.

Gasoline is less profitable than distillates for the refineries, and "so refiners want to maximize their production of distillates," said Amanda Kurzendoerfer, a commodity analyst at Summit Energy.

Last week, refineries operated at 86.6% capacity, up from 85% the previous week. Going into the summer driving season, refineries typically operate at about 90% capacity.

Gasoline supplies decreased by 1.7 million barrels and are in the middle of the average range for this time of year. Analysts were looking for a decrease of only 800,000 barrels in gasoline stockpiles.

Distillates increased by a strong 1.4 million barrels and are in the lower half of the average range for this time of year. Analysts were looking for an increase of 1.1 million barrels in distillate supplies.

"At this point gas has taken a back seat to distillates," said Schork.

High demand for distillate fuels in China, India and the Middle East for industrial production and diesel engines keeps global supplies of distillates tight, said Kurzendoerfer.

While refineries are making diesel fuel to feed global demand, consumers are paying record high prices at the pump. The nationwide average for a gallon of regular unleaded is $3.758 according to AAA.

Typically, gas prices are higher on Memorial Day than for the July 4th holiday, according to Schork. "Weather or not we stick with that seasonal script depends on refineries," said Schork.

The AAA national average shows gas prices up more than 11% over the past month and up nearly 22% from year-ago levels.

"I would expect to see - at least I would hope to see - an increase in gas [supplies] next week," said Schork. Supplies of gasoline "should be increasing as we get ready for the summer driving season and we have not seen that yet," he said.