(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON- By restricting crude processing and focusing on making gasoline, U.S. petroleum refiners have made progress in reducing excess stocks of middle distillates such as diesel and heating oil.

In the first half of October, however, the strategy has been challenged by softening domestic gasoline consumption, forcing them to make even deeper cuts in crude processing in an effort to stay on track.

The volume of gasoline supplied to domestic users fell in both the two most recent weeks, interrupting the previous recovery, according to estimates from the U.S. Energy Information Administration.

Gasoline supplied to domestic users is now 9% below the previous five-year average, from a deficit of 4% at the start of the month ("Weekly petroleum status report", EIA, Oct. 21).

In a sign of weak consumption, inventories increased by 2 million barrels last week, the largest one-week increase since the end of May, reversing the previous downward trend.

Gasoline refining margins have fallen to $7 per barrel, from $9 earlier in the month, reversing the previous upward trend, based on futures prices for deliveries in December.

Refiners have attempted to limit the build up in gasoline inventories by making even deeper reductions in crude throughput and gasoline production

Crude processing was 16% below the five-year seasonal average last week, down from a deficit of 13% the previous week, and again reversing an improving trend.

The refiners' strategy has proved broadly successful, bringing gasoline stocks down to the five-year average, and gradually reducing the surplus of both crude and distillates.

But progress has been slow and total stocks outside the strategic petroleum reserve are still 113 million barrels or nearly 9% above the five-year average.

Globally, oil consumption has not recovered fast enough to absorb the increase of 2 million barrels per day in crude oil production scheduled by OPEC+ for the start of next year.

Saudi Arabia, Russia and their OPEC+ partners will almost certainly have to postpone the increase for at least three months until the start of April, or risk increasing stocks again.

John Kemp

(Editing by David Evans) ((john.kemp@thomsonreuters.com))