Empty skies ground crude demand

Empty skies this summer cloud an optimistic outlook for gasoline demand and will limit crude processing at US refineries.

A nascent rise in spring gasoline demand through April raised hopes of a recovery for the chief US transportation fuel in its peak demand season. But US refiners remain wary of outrunning demand. A weaker economy and crippled air travel industry will prove a new limiter on gasoline production even as communities across the country ease restrictions.

"It is a demand driven event," Marathon Petroleum chief executive Mike Hennigan said this week. "When demand is sufficient for us to change our strategy, we will do that, but right now we are staying at minimum rates."

National gasoline demand collapsed at the end of March under travel and business restrictions to contain the spread of the Covid-19 pandemic. Implied US gasoline consumption fell by almost half compared with year-prior levels, to 5.1mn b/d. Refiners slashed crude processing rates in response. Throughputs were 21pc below the national average by mid-April, and gasoline production was lower by 34pc.

Implied demand began to creep higher two weeks later and refiners now see gasoline demand returning. Fuel retailers reported a 5-15pc increase in demand during the month in some regions. Movement data tracked by Google using Android devices showed trips to retail and recreation destinations at the end of April within 30pc of year-prior levels in the midcontinent, Rockies and US Gulf coast, higher by roughly 10 percentage points from the beginning of the month. Grocery and pharmacy trips in those regions were at or above year-prior levels by the end of April, according to the data.

Marketers even contemplated a May spike in consumption as US drivers emerge from a month of lockdown.

"I think being on quarantine, being cooped up and just going crazy in the house — people are going to want to get out," Phillips 66 chief executive Greg Garland told investors.

Diesel doldrum

Diesel offered US fuel producers hope in March. Refiners in most regions at the time could earn at least $20/bl more making diesel from a benchmark crude compared to gasoline. Agriculture and commercial shipping demand kept consumption of the fuel steady in early April. Major refiners idled gasoline-specific equipment, such as fluid catalytic cracking (FCC) units, to meet diesel demand without pouring gasoline into storage.

The industrial consumption offered a home for jet fuel stranded by the abrupt worldwide grounding of that industry. Jet fuel demand sank by two-thirds over three weeks in March. Implied consumption in April averaged the month's lowest demand since 1969, based on Energy Information Administration (EIA) data. The US airline industry that year boasted a capacity of 251bn seat miles — roughly 90pc of what Delta alone flew last year.

Refiners saw no quick return for airline demand. Even recovered carriers would be leaner and more fuel-efficient. American Airlines and Delta Air Lines separately announced they would retire 145 older aircraft by the the middle of next year. Airlines must win over travelers exiting lockdown to return to a fast but often cramped transportation.

Refineries can reduce but not eliminate jet fuel production. Some of it can move to ground transportation. Jet fuel has a sulfur content of 3,000ppm to help lubricate airborne engines. US road diesel may contain no more than 15ppm. Lower refining rates allowed facility to use sulfur-treating capacity including hydrotreaters to make jet suitable for the stronger diesel market.

That will not continue at higher rates, refiners warn.

"As crude rates start to come up, the diesel hydrotreating capacity is not going to grow with it," HollyFrontier chief executive Mike Jennings said in a quarterly earnings call. "There may be growing barrels of jet in tankage as things go forward if people try to increase crude rates to meet gasoline demand."

Diesel's strength is also waning. US transportation and warehousing jobs fell by 584,000 in April — transportation's unadjusted unemployment rate surged to 18pc during the month. Slowdowns in oil production and manufacturing cut the need to move industrial material across the country. US ULSD stockpiles rose in every week since late March to reach their highest levels in three years at the end of April.

Refineries can swing 5-10pc of their overall production between gasoline and diesel output. Jet fuel blending blunts even that limited ability to satisfy gasoline consumption without adding to diesel stockpiles. Conditions leave the already weak west coast and stronger midcontinent markets vulnerable to inventories with nowhere to move.

Conditions could lead to more extreme steps. Valero described running diesel into its gasoil — an FCC feedstock — cutting diesel output and vacuum gasoil (VGO) to help fill gasoline units with material that would have been wasted in such a use two months ago. Refineries will tweak crude distillation to keep naphtha for gasoline-producing reformers that would have previously gone to jet fuel. And the industry may overall continue limiting crude processing even as summer gasoline demand rises.

"We are just being very careful trying to match demand with that region, with the understanding that the west coast, the midcontinent, you have to get that right," Valero chief operating officer Lane Riggs said in April. "If you get it wrong, you get into having to do very uneconomic things to fix those problems."

By Elliott Blackburn