With road fuel demand slightly up but refining utilization still down, how are US refiners coping?
Join John Demopoulos, vice president of North America refined products and Steve Weber, vice president of Americas consulting for an update on the status of US refining and what’s to come next.
John: Welcome to the podcast series, "Driving Discussions." In this series, we're discussing the forces that affect road fuels globally. And in this episode, we'll be giving you a U.S. refining update. "Driving Discussions" is brought to you by Argus, a leading independent provider of energy and commodity price benchmarks. My name is John Demopoulos and I'm the Vice President for North American Refined Products here at Argus. And joining me today is Steve Weber, the Vice President for Consulting in the Americas here at Argus. Steve has over 40 years of experience in refining, both for the major oil companies and elsewhere. And he's been doing consulting for I think around 12 years. Steve, thanks for joining us.
Steve: Thank you, John. It's great to be with you today.
John: So I think we wanted to start off just by looking at the state of U.S. refining right now. I mean, obviously, we've all seen demand for the products have dropped off enormously because of Covid, refiners have scaled back throughputs all across North America and, of course, globally. And maybe, we're seeing some inching back to higher production levels. But where do things stand right now?
Steve: Great question, John. To start with, the U.S. refining industry has been suffering dramatically since the pandemic has kicked in. We saw utilization for all the U.S. drop from the high 80s down to the upper 60s with the bottom being about 67%, 68%. That has recovered some as we've gotten into driving season, people appear to be taking more driving vacations than flying because of concerns about Covid. And we've seen the utilization rebound to about 77.5% with the data from last week from the U.S. EIA.
That's still very far below where the industry wants to operate. Typically, the industry would love to see high 80s, low 90s, that gives them refineries that run more efficiently. It spreads their cost over more volume or more tons depending on how you do your calculation. And it's just a better operation for the plant itself. They're just more efficient, easier to operate. When you cut back the plant to the low 60s or mid-60s, process units don't tend to like to operate there very well. They're more difficult to operate and so it could provide more opportunities, so to speak, for unit upsets and problems overall operating the facilities.
John: And have we seen...I mean, you mentioned the sort of difficulties of operating at low rates, and whether that's, I guess, units turned down or units just idled completely. But have we seen any, sort of, any real operational issues emerging of refineries during this period or is it really been more of a case of, you know, economically those plants haven't enjoyed this time?
Steve: Well, the industry, in my view, has been fortunate that we've not seen a lot of incidents where there's been accidents or major issues at refineries. The larger refineries in the country tend to have what we call two different trains. So a train we define as, as an example, a crude unit, a vacuum unit, an FCC, a reformer, some other downstream units like hydrotreaters. And so if they have multiple trains to reduce their utilization, they can completely shut down one of those trains and operate the other one. So that helps their efficiency is they can run one part of the refinery pretty much fully utilized while the other train is shut down.
Smaller refineries that tend to only have one of each of these types of units, it's more challenging. My experience as refinery engineer and in operations is that if you try to operate some of the equipment at 60% to 70% utilization, it can be done but it's more challenging, typically the energy efficiency is lower and the refinery is more difficult to operate to make specification products. But it seems that the industry is coping with this pretty well. But I believe they're eagerly awaiting the opportunity to get utilization back up to more typical levels, but that's going to be a while before that happens.
John: Yeah, and great that they've been able to operate safely during this period. You talked about throughput creeping up as people perhaps take more road trips, use more gasoline, rather than flying and pushing up jet fuel demand. Has there been any sort of geographical imbalance to that slight recovery? I don't know if we would talk PADDS or individual, sort of, geographies but has one geography, sort of, outperformed others in terms of recovering and seeing rates push back up again?
Steve: The Midwest seems to be recovering a little bit more than maybe the other regions. The U.S. Gulf Coast, which is PADD three, has become more dependent on exports of some refined products such as gasoline and diesel. And unfortunately, the main markets for those exports are Latin America, and Mexico, Brazil, some of our neighbors to the south have seen significant impacts from Covid and have been shutting down their economies because they're trying to contain the pandemic. So the export markets have been extremely weak in recent weeks. But we're hopeful that, much like the U.S., which is starting to see some reopening of states and different regions, that we'll see Mexico and some of the other...Mexico, Brazil, and others in the Latin American market where we, the U.S., are big suppliers will start to rebound.
There is some gray in the clouds here, though, as you've noted that some of the states in the U.S. that have started to reopen, or perhaps reopened first, are having to consider or actually implement going backwards in these reopenings. For example, California just announced they're going to shut down all the restaurants except for outdoor dining. Texas has seen a significant rise in its Covid cases and the governor has pulled back somewhat on some of the plans to reopen and has implemented a mask policy. We'll see if there's going to be further reductions in the business environment that certainly has the potential to stop the recovery momentum that we've seen. And we could see that backtrack some.
But surprisingly, gasoline demand has gone from less than 6 million barrels a day at the low point back in April to over 8.5 million barrels a day, which is still a million barrels a day below typical for this time of year. But it is a bit surprising that we've seen that big a rebound. So to me that says people are taking vacations, maybe a lot of us are still working from home or commuting consumption of gasoline is lower, but people are taking vacations and, of course, the airline industry has been tremendously impacted. We are starting to see a bit of a rebound in that area. But I think people are making the decision that they'd rather spend time in a car with their family than get on an airplane with 100 other strangers and take the risk of developing...being exposed to Covid.
John: It's a tough call, isn't it? Spend time in a car with my family or catch Covid, it's a catch-22 right there. You mentioned cases in Texas and the very high levels of infection in Texas at the moment. And of course, Texas is homes to what, I don't know, perhaps a third of U.S. refining capacity. Maybe I'm exaggerating that. But we had talked several months ago about the potential impacts on operations of refinery personnel having to quarantine or having to socially distance at refineries. Are there concerns the refineries will struggle in the environment with very high infection rates in Texas?
Steve: Well, there's been some...it's a very good question. There's been some reports recently that have become public that a number of the refineries on the Gulf Coast and then in the Galveston Bay area, Marathon for one, was quoted that they've seen a higher incidence or reports of people testing positive for Covid. Some of the other refineries in the Port Arthur area, the same way. To our knowledge, that hasn't impacted operations yet. The structure of hourly workers is that if there's someone...from my experience anyway, if there's someone that is ill and needs to be...can't come to work that they'll cover it with overtime. But if this situation does continue to deteriorate, eventually you'll have less people to choose from a pool of trying to operate the refinery.
So, thus far, we don't know of any Covid-related impacts to refinery utilization or operation. But if we can't bend the curve in Texas or in all the Gulf Coast states, I mean, if you look at a map, just about every state in the Gulf Coast is seeing a resurgence of cases because of a number of factors including probably reopening a bit early. And so far, it's not impacted the refinery industry or the petchem industry for that matter. But we have to keep an eye on it because if they don't have qualified and trained operators, enough of them to continue to operate, they'll have to make business decisions to shut down various units and in the longer term that could impact supply. The good news is we have a lot of gasoline in inventory. We have a lot of diesel in inventory. So if it was a short term phenomenon, you would not expect to see impacts for the consuming public. We've got very high inventories right now for most refined products in the U.S.
John: Yeah, and I'm sure top of all those refiners' minds is more of the sort of safety aspects than anything else.
John: And you touched on, sort of, the potential for longer-term impacts, but what are the systemic impacts on demand that we should be looking at? I mean, just how long is it going to take for it to get to come back and just how much of a boost could we have from folk moving to like passenger vehicle commutes, rather than trains and buses and that kind of thing?
Steve: Well, let's talk about the aviation industry first. In the U.S., jet fuel consumption prior to Covid was in the range of 1.6 to 1.8 million barrels a day of jet fuel at the trough of demand, which based on the statistical data that had dropped all the way to less than 400,000 barrels a day as airlines basically went on a minimum schedule and people just weren't flying and it's understandable why they've made that decision. The demand, based on statistical data from the EIA, has rebounded to about 900,000 barrels a day. We even see bookings, reports of bookings for flights in August and September going higher. And a few airlines are actually adding back some flights. But, you know, this whole situation in international travel has been severely curtailed. So our view is it's going to be well into 2021. And it could go into 2022 before we would even approach the levels we saw of air traffic and airline passenger utilization prior to Covid.
We’re going to need a vaccine, we're going to need better medical treatment, drugs that can take care of curing this disease more quickly before, I think, the consuming public will get back to feeling comfortable being on an airplane. And I don't relish the idea of wearing a mask on a four-hour flight to Canada, or a seven-hour flight to London, or going to the Far East for the duration. But we are in a different world now and whatever the new normal will be, we will see.
Going to gasoline, there's a number of reports that companies are seeing some of the efficiencies perhaps, if you're going to use that term, of people working from home and that they're able to get their work done by not having to come to the office. So that's going to be a key measure of how many companies are going to allow people, maybe not every day during the week, but let them work more days from home, less days at the office, which will certainly cut the consumption of fuels for commuting. We think that's going to be, you know, a fairly substantial impact. It's a little bit hard to pin it down right now because we're still kind of semi-closed in most states in the U.S. But that could have an impact of several percentage points of gasoline demand.
We've already been moving toward more fuel-efficient cars, electric vehicles, alternative fuel vehicles. We probably...and we've said this before, but we've probably seen the peak of gasoline consumption in the United States a couple of years ago due to the changes in the automobile fleet. It will be gradual. I mean, we all don't buy a brand new car every year. The fleet has to turn over and that takes time. But so it's going to be a challenge for the global refining industry and for the U.S. refining industry in the long term because gasoline demand in the United States has already likely peaked. And it also depends on what the next administration, whether it's the current one that's reelected or a new one comes in and what their policies are on ethanol and gasoline, renewable fuels and things of that nature as far as impacts on the refining industry going forward. But it's going to be...it has been and will continue to be a very challenging market for that industry.
John: And of course, the thing that we haven't touched on as we kind of meander between aviation and gasoline is diesel. And from a consumer's perspective, a diesel consumer's perspective, this is all great because diesel prices are down with all of that jet fuel effectively being dumped into the diesel pool, although I know I'm simplifying that. Is there any possibility that the diesel engine could see a come back as part of this, or is that just a short-term impact?
Steve: Well, it's a great question. Diesel fuel demand has dropped by about 15% versus where we were in the fourth quarter of 2019. You would think that with everybody staying at home and ordering on eBay or their favorite website and having it delivered that it would actually sustain higher diesel demand. But to the point you raised with jet fuel, demand being lower, refiners where they can are allowing the jet fuel that's excess to move into the diesel fuel pool. So there's plenty of diesel available and demand being slightly lower than we've seen in 2019. And prices being attractive, we would think that there was that push.
But U.S. drivers just don't seem to be all that enamored with diesel vehicles, they really haven't caught on. You do get better mileage per gallon as far as efficiency on diesel fuel if you have the right engine technology, but I think diesel still has a stigma of being a dirtier fuel than gasoline. So the automobile public, in the consuming public in the U.S. just doesn't seem to catch on there. So, we don't really see that being a big factor going forward. And frankly, I think if you go to your local automotive dealership, there's just not that many options for diesel cars that are available, people aren't interested and the automobile makers don't want to make them because the consuming public just doesn't seem that interested in that type of vehicle being fueled by diesel.
John: Yeah, it'd be a long slog for car manufacturers to get that market working and clearly much more interested in things like EV at the moment than going after diesel engines. And one final question for you, Steve. Obviously, none of this has been good for refiners. Everyone's been suffering to some extent. But can you give us a sense for what type of refiner is going to be suffering the most? Which ones are there potentially concerns around as this thing develops?
Steve: Great question, John. But, typically, the second quarter, and this is not 100% consistent, but the second quarter of the year is typically when refinery margins are seasonally at their peak. So, when we see earnings coming out from the various companies, which will be reported over the next month or so, we're going to expect to see some quite low numbers relative to what you would have seen in 2019 or prior years. Because obviously with low utilization, and we talked about the crack spread being lower than typical for this time of year.
The numbers are not going to be real attractive to Wall Street. As far as refiners that will suffer the most, obviously, those that are less complex, that are more simple refineries are going to be impacted more dramatically than a complex refiner who has a lot of upgrading like an FCC, or a hydrocracker, or coker, or all of those in their portfolio, in their refinery location.
So, those complex refiners have more opportunity to be selective on feedstocks, and can optimize based on what best fits their refinery. They can even run the light sweet crudes, if that makes sense to them and the economics dictate. But they have more flexibility to move around and look at what feedstocks are available and can optimize their facilities.
We've seen in the industry now, as we've gone through this very difficult period, that some of the energy companies are looking at optimizing their plant portfolio, and some companies have put assets up on the market. For example, Shell announced that the Convent refinery in Louisiana is being considered for sale. There are some facilities in the Rocky Mountains that are being looked at as far as potential divestitures by companies.
And so the market, it's not unusual for this timeframe when we see a very challenging economic environment that many companies are looking to reposition their portfolios. And if the asset doesn't fit into their long-term strategy of refining and petrochemical integration, for example, that they feel those assets could be better served by being purchased and operated by another company.
So, it's going to be a very interesting period. We don't see refined product demand returning to 2019 levels until perhaps mid to late next year. And that will depend on, as we've talked about earlier, an effective vaccine being available, better treatment drugs for treating Covid. And it will be a challenging market for the next 18 months or so.
John: Yeah, it almost feels, doesn't it, like the way the refinery ownership changed a little bit after the credit crisis and private equity came in in certain instances, you sort of wonder if that's how the industry kind of moves again over the coming year. Steve, pleasure to have you with us, thanks for joining us. And if you enjoyed this episode, then please do tune in for other episodes in this series "Driving Discussions." For more information about the U.S. refined products markets, and for more information about August Consulting, please visit argusmedia.com.