The US refining industry is entering unchartered territory as it navigates impacts from the Coronavirus. How will refiners handle the virus? How will their markets be affected?
Argus VP of North America Refined Products, John Demopoulos, and Argus Senior Consultant Ed Arnold discuss COVID-19 impacts to US refiners.
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John: Hello and welcome to "Driving Discussions." In this series, we're discussing the forces that affect road fuels globally. And in this episode, we'll be discussing the ongoing and possible future impacts of the Coronavirus on U.S. refining. "Driving Discussions" is brought to you by Argus Media which, as many of you know, as the leading independent provider of energy and commodity pricing information. My name is John Demopoulos. And I'm the vice president for North American Refined Products here at Argus.
Ed: And I'm Ed Arnold. I'm a senior consultant in Argus Consulting Services. I work out of Houston. I cover the refined products and crude oil markets. I'm also an industrial microbiologist. I got my degree in industrial microbiologist before I came a chemical engineer. So, that helps me, from my perspective, understand the Covid virus just a little bit better than most people, most likely. And I can interpret some of the numbers that are coming out of the World Health Organization and the CDC without any problem.
John: Ed, you are truly the perfect person to talk to about this particular issue, as both a industrial microbiologist and somebody who's been living and working around refineries for a large proportion of your career. So, we are lucky to have the right man in the right seat right now. And I think, as we've discussed in the past, one of the big issues coming about for the oil industry as part of this COVID-19 outbreak and response is how refineries keep running, what BCPs they have in place, what the impacts are on their operations. Give me a sense, first of all, of what refiners are looking at right now.
Ed: Okay. First of all, in general, what I see is an uneven response. So I've been talking to quite a few of my contacts at U.S refiners in the last week. Some refiners are proactive. Some are quite proactive in terms of getting their operations staff ready. Others are a little behind the curve, from my perspective. They're talking about doing things, but I don't get a sense that they've really done a lot yet. I am particularly concerned about the effect on operations staff. That's not a deep resource. There's not a lot of backup. I think that's a definite risk issue in terms of staff availability. So the best refiners are going to have to train backups and have them ready.
John: You know, many of us listening don't, perhaps, have as strong a sense for how refineries operate as you do. I mean, give us sense for, you know, how many personnel are required to run an FCC to keep a crude unit running. How much cross-training does typically exist? Is there a single role that often simply can't be replaced and simply has no backup?
Ed: Well, the number of staff obviously depends on the size of the refinery and the number of units that are grouped together. But let's just talk about one general area of the refinery. Let's talk about the crude and vacuum unit. You might have, on each shift, eight operators at a average refinery, and then you've got four shifts in most refineries. Some refineries will operate with a three-shift system. The key point here is, let's just talk about a dozen operators on a particular shift. They'll work for 8 or 12 hours and then they'll be replaced. They're all important. There's different layers of supervision, then there will be the line operators. All have key jobs. And as I mentioned, there will be three shifts or four shifts. What I'm really concerned about is if there's contamination on one shift, that whole shift would probably have to go into quarantine and have to be replaced. I'm also worried about the interaction between shifts. In most refineries that I've worked in or around, at the shift change-out time, there's a lot of interaction between the shifts. In addition to that, they're sharing the same control panels, the same computer terminals, the same desks and chairs.
John: So Ed, tell me, I mean, maybe we're talking about operational issues. We're talking about operational problems that might cause a refinery to slow its output in a sort of contamination scenario, like the one that you outlined. What about commercially? I mean, obviously certain demand for certain refined products has dropped globally, jet being the very obvious one. But there are others, too, and there will continue to be other fuels that see less demand as the response to this health crisis continues to roll on. That's not good for refinery margins. I mean, yes, crude is cheap. We have an OPEC price war going on, but do we see commercial reasons for refineries to slow their output at this point? And will we see commercial reasons?
Ed: I don't think we've seen it quite yet, but I think we will. So I definitely think there will be a drop in demand for gasoline distillate, and especially jet fuel. More about that later, if you want to ask me some questions on that. But what that means is that refineries, at least most of them, will have to turn down. I expect a decrease in crude runs over the next three to six months.
John: I guess, where's that gonna happen? I mean, here in the United States, obviously, there are big refining clusters, the really big one at the Gulf Coast, a bit on the East Coast, and then, we're kind of, you know, Chicago and dotted around the country. But where do we see refineries maybe most impacted by that?
Ed: I think they're gonna be impacted everywhere. I mean, we're seeing the earliest impacts of the virus in PADD 1 and PADD 5. So I definitely think they'll be the first that may have to turn down and probably will have to turn down. Houston's starting to see an impact, and I imagine that Louisiana will see a significant impact soon. So I think every major refinery center will see an impact eventually.
John: Presumably storage is filling up very quickly. I mean, we have hit contango for most markets.
Ed: That's correct. So inventories are already high. There's not a lot of room to store gasoline distillate or jet. So they're already in a tight spot.
John: Let's talk about demand for fuels. Obviously, that's the thing that would be driving tightening margins, run cuts, that kind of thing. Where are we seeing that drop of demand and where will we see it? I mean, I spoke to somebody yesterday about the idea of staycations bolstering gasoline demand, which I think you and I talked about, and you sort of disagreed a little bit with that idea. But how do we see this playing out within the United States? Where does demand, you know, fall the most, grow a bit perhaps?
Ed: Okay. I think gasoline demand will drop because, if for no other reason, people won't be driving to work as much. People are gonna be working from home. A lot of people still drive to work every day. Staycations may become a possibility, but honestly, I think staycations will mean staying home and vacationing in your backyard. This is gonna get pretty nasty. You won't want to be on the interstate using public restrooms, going into restaurants, going into motels. I think we're gonna see a definite decrease in gasoline demand. Distillate, I see a definite decrease there. Perhaps not as big, but I see a decrease because I think discretionary spending by consumers and businesses will drop. But what that means is less truck traffic across the U.S., less train traffic because there will be less big-box items purchased, less clothes purchased. Food will still be consumed. I expect FedEx and UPS-type deliveries and Amazon deliveries to ramp up, but I don't think that'll compensate for the drop in discretionary spending. And finally, jet fuel, we've already seen a drop there, I think that's gonna continue. I really think we're gonna see some dramatic effects on jet travel domestically, as well as externally.
John: You know, obviously we can't predict how long this outbreak lasts, how far it has to go, but maybe we can say a few things about how long the impacts, even have a quarter of substantially reduced growth like this lasts. I mean, even if we saw demand slowly returning back to normal in the second quarter of this year, presumably we would be seeing the impacts on the refining sector for, you know, a year to come after something like this, right?
Ed: I think that's right. I think the best perspective right now is to look at SARS. So it took a recovery for SARS of seven months after the peak. So I think we have to first go through a peak, and then we can start looking at somewhere between a 6 to 12-month recovery. So this virus and its effect won't be exactly like SARS. It's a little more infectious. Fortunately, the ramifications aren't as severe, but it's definitely more infectious. So after the peak, let's just say 6 to 12 months. That's my best bet.
John: And tell me, the impact on refiners, kind of short term go-to-market strategies. Obviously, here in the United States, for years now, it's been a case of find the demand wherever you can just to keep the refinery running at these very high margins, low crude costs, low inputs. Does that change anything? You know, tightening margins, people aren't gonna be looking for, you know, incremental demand so aggressively anymore. Where are they putting their barrels?
Ed: Well, they will not be looking as aggressively, as long as the margins are tight. That's for sure. I think, certainly in PADD 3, they'll be looking for increasing exports to compensate for a decreased domestic demand. So that's a real possibility. So that can help PADD 5 and PADD 3. Pad two, they really don't have any place to go, other than a PADD 2, perhaps a little bit into PAD 1.
John: It's difficult, really, to see many import markets particularly keen to take those barrels now anyway, right?
John: And take us back to SARS. When that outbreak took place, there wasn't really much of an impact on the U.S. refining industry itself beyond the, perhaps, loss of some global demand. Is that correct?
Ed: Yeah. It didn't impact the U.S. a lot. So when I talk about points of comparison, I'm talking about Asian refineries. But this one's going to affect the U.S., we already see that. So this virus is a lot more transmissible than SARS was. That's why it's already here. That's why we're making some big changes already. No more NBA for a while, hockey games, baseball. It's true. I think we've just seen the tip of the iceberg.
John: Not to mention Premier League soccer, Ed. I know that's one of your favorites.
Ed: Yes, certainly, and the rodeo.
John: And the Houston Rodeo, of course, has been called off. Ed, thank you so much. And if you enjoyed this podcast, please do be sure to tune in for the other episodes in our series, "Driving Discussions." For further information about the U.S. refined products markets, you could also check out our subscription, Argus US Products.