US diesel flips to rare discount to gasoline, VGO

The Covid-19 pandemic is wrecking havoc on US refined products supply and demand, reversing typical price relationships between products and forcing refiners to consider options that would have been previously improbable.

A large and growing surplus of diesel, combined with low demand, has pressured prices to deep discounts to gasoline in the past four weeks— a sharp reversal of seasonal norms. The diesel weakness also means intermediate feedstocks, such as vacuum gasoil (VGO), are pricing above diesel, slashing into already thin margins.

US Gulf coast Colonial pipeline ultra-low sulphur diesel (ULSD) fetched 9.19¢/USG below conventional gasoline yesterday, compared to a 23.28¢/USG premium the same time a year ago. On 16 September diesel fell to 11.96¢/USG below gasoline, notching the deepest discount since 21 August 2017, when Hurricane Harvey temporarily cut off production and transportation on the Gulf coast.

Diesel usually trumps gasoline

Gulf coast diesel has carried year-round premiums over gasoline for most of the last three years amid growing export demand for diesel. This premium tends to narrow over the summer, when gasoline prices rise from higher demand and tighter specifications, and widen going into fall, when the market transitions to winter gasoline.

But this year, ULSD has consistently traded below gasoline since mid-August. The pandemic destroyed gasoline and jet fuel demand in the spring, prompting refiners to maximize diesel. Later, while gasoline demand rose as states began to reopen, the economic fallout of the pandemic kept diesel demand low.

This has led to a large buildup of diesel stockpiles — at 61.5mn bl in the Gulf coast region alone during the week ended 11 September, up by 34pc from year-ago levels, according to data from the US Energy Information Administration. But implied diesel demand fell to 2.8mn b/d, 27pc below year-ago levels. Meanwhile, gasoline demand has recovered to within 5pc of year ago levels, at 8.5mn b/d.

Gulf coast ULSD prices also fell below VGO for the past two sessions, reaching $0.91/bl below VGO on 16 September, the widest discount since 7 May. Around 30pc of fluid catalytic cracking (FCC) output is ULSD, the other 70pc gasoline.

When ULSD, an end product, trades below VGO, the feedstock, refiners need to consider reprocessing ULSD as an FCC feedstock to turn more of the excess diesel into gasoline. While it is common for refiners to alter the cut at the distillation level to tilt production away from diesel, it is rare for ULSD— typically one of the highest priced, highest margin refined products — to be reprocessed as a feedstock.

Cracking diesel at the secondary level could help cut losses, but the most effective way to mitigate weak margins is to cut throughput at the crude and secondary unit levels.

Heavy maintenance ahead

Economically driven refinery unit shutdowns could follow early fall maintenance for some US refineries, along with prolonged storm-related outages at some plants, sources say.

Phillips 66 had shut its 250,000 b/d Alliance refinery in Belle Chasse, Louisiana, ahead of Hurricane Sally's landfall earlier this week. The refiner has decided to extend the shutdown by bringing forward October maintenance work. Phillips 66 said previously it planned to shut Alliance from October to December for economic reasons.

Phillips 66's 260,000 b/d refinery in Lake Charles, Louisiana, was also shut down in late August ahead of Hurricane Laura's landfall. This refinery, among others in the Lake Charles area, remain unable to restart because of power outages. Citgo's 425,000 b/d refinery in Lake Charles was hard hit, with some structural damages reported as well.

ExxonMobil has delayed a planned shutdown for one of two FCCs at its 502,500 b/d Baton Rouge, Louisiana, refinery. Multiple sources say the FCC was originally to be idled mid-September for economic reasons, but that move has been postponed to end-September.

FCC margins have steadily improved in the past week, but crude margins are still depressed, posing difficult choices for refiners.

Gulf coast 3-2-1 margins based on WTI crude averaged $7.40/bl so far in September, down from $12.96/bl during the same period in 2019.

By Chunzi Xu and Daphne Tan