US refiners seek crude plan without collateral damage

US refiners are urging President Donald Trump's administration to ensure efforts to help domestic oil producers do not make their operations even more challenging.

Suggestions to reconfigure US refineries, raise prices on imported crudes or block those imports entirely would complicate business for refineries already grappling with sharply lower demand and trying to limit the spread of the coronavirus pandemic to their facilities, trade groups warned ahead of a White House meeting with energy executives today. Trump afterwards said that the US would support the industry but did not announce any specific new initiatives.

Proposals could add to a gasoline glut, make facilities less competitive globally or involve unrealistic expectations for the industry.

"In this tremendously challenging economic environment we are in, the last thing that we need is to make a bad situation worse," said Geoff Moody, senior director of government relations for the trade group American Fuel and Petrochemical Manufacturers.

From curtailments to embargoes

Producers and oil-aligned states have pressed for organized efforts to support oil prices collapsing under the twin pressures of sharply reduced demand and a market share battle between Russia and Saudi Arabia. Proposals have included state-level curtailments and tariffs on imports. US senator Kevin Cramer, (R-North Dakota), proposed cutting off imports entirely in a nationally broadcast interview yesterday.

"If we cut off imports for awhile, at least during the emergency, and retooled our refineries to the degree they need retooling to take US crude, I think we could keep our industry afloat," Cramer said. "I think that would be a reasonable emergency response at a time like this."

US refiners processed record volumes of light, sweet crude typical of domestic shale production before the March collapse of fuel demand. Refiners last year distilled the lightest average volume of crude in 35 years of Energy Information Administration (EIA) records. Facilities that would otherwise limit purchases of the crude devoured production that grew so large that standard discounts for heavier, sour crudes vanished. US independent refiner Valero, which operates a fleet of cokers suited to heavy sour crude processing, reached record levels of light, sweet crude distilling in 2019. It considered the nearly 1.7mn b/d of light crude processing — 63pc of all crude it processed in the fourth quarter of 2019 — to be roughly its maximum rate.

Not all of the lighter crude US refiners process are from domestic shale. Refineries in the Atlantic coast, where most operators rely on lighter feedstock, have limited access to US production. More expensive rail tanker or Jones Act vessel shipments can make the crude more expensive than waterborne imports. Refineries running these Brent-priced imports in March saw average margins four times higher than those seen for Bakken crude after rail costs to ship to Philadelphia, based on Argus assessments. The single-largest foreign supplier of light, sweet crude last year was Canada, based on EIA data.

Too much gasoline

Refiners will also want to avoid converting a crude oversupply to an even larger fuel glut. Shale crudes, with some exceptions, tend to yield material best suited for low-octane gasoline. Only jet fuel offers US refineries worse margins than gasoline as communities across the country limit commuting and other travel to contain the coronavirus pandemic.

Implied US gasoline consumption last week fell by 25pc to 6.7mn b/d, the lowest level in 26 years. US Gulf coast gasoline settled at a 10¢/bl discount to WTI Houston, a light, sweet grade that includes west Texas production shipped to the Texas coast.

State and federal regulators have had to delay requirements to shift to summer specification gasoline because the drop in demand has left too much winter fuel in tanks. Refiners have disclosed run cuts of about 30pc to manage the drop in jet and gasoline demand, which will mean even less room for crude processing.

By Elliott Blackburn