Gasoline rebound may spur US refinery restarts

Higher US gasoline prices are reviving interest in refinery unit restarts along the Gulf coast, while a shortage of feedstocks could require an accompanying increase in crude runs, despite falling margins that may set a low ceiling for returning capacity.

Before last week's 8.2pc drop in demand, US gasoline saw five consecutive weeks of rising demand, which appeared to have picked up pace in May as a sign of recovery from Covid-19-related restrictions. But despite the latest bearish data and rising inventories, Argus-assessed Gulf coast conventional gasoline prices have steadily risen this month, maintaining above 90¢/USG this week, the highest levels since 12 March.

As a result, some Gulf coast refiners are considering bringing back online fluid catalytic cracker (FCC) units that had been shut or operating at reduced rates since April, according to sources. FCCs convert vacuum gasoil (VGO) into gasoline and blending components.

A shortage of gasoline feedstocks, such as VGO and naphtha, means that refiners may need to increase overall crude runs as well. VGO supplies have tightened amid increased demand from fuel oil blenders, as well as a slowdown in imports from Europe in April. Naphtha supplies have also fallen behind demand from exporters, gasoline blenders, and even petrochemical producers.

Refiners specifically sought to reduce gasoline production in the second-half of March through April, when gasoline margins were in the low single digits and dipped into negative territory several times. This meant shutting or reducing FCC runs, maximizing diesel output, and cutting crude throughputs.

But an excess of diesel production cut sharply into US Gulf coast ultra-low sulphur diesel (ULSD) margins against WTI Houston, which fell from an average $12.87/bl in April to $4.83/bl so far in May. Diesel margin erosion more than offset the relatively modest rise in gasoline margins. Overall Gulf coast 3-2-1 margins against WTI have fallen to an average of $4.54/bl so far in May, down from April's average of $6.07/bl, and $14.94/bl during May 2019.

Low refining margins would mean refiners are likely to continue capping crude runs, while adjusting secondary units to shift more toward gasoline production and minimize diesel. Feedstocks like VGO will likely remain in short supply as a result.

US Gulf coast refiners have operated at an average of 72pc of capacity in the first-half of May, down from approximately 74.9pc in April, data from the US Energy Information Administration (EIA) show.

By Chunzi Xu and Daphne Tan