The plunge in gasoline and jet fuel demand in the wake of responses to the Covid-19 pandemic has proved to be the trigger for a rash of refinery closures.
US and Canadian refiners have shut over 800,000 b/d of crude capacity this year, and at least 575,000 b/d of that will stay closed. Another 500,000 b/d of US refining capacity is seeking a buyer. US executives expect more closures to come. "The pandemic only pushes it forward, and we probably get it sooner than later," Phillips 66 executive vice-president of refining Bob Herman says. "You will see a lot of people make their moves early."
Over 1mn b/d of capacity closed in the US and US territories in the wake of a smaller, although still pronounced, recession in 2008-09. Most of those refineries were in the Atlantic basin market. But pressure has increased this time in the west. About 100,000 b/d of capacity in the Rocky Mountain region halted crude processing as it was outcompeted in its niche markets. Calcasieu Refining, configured to produce mostly gasoline-focused intermediate products, idled for at least the month of August. Marathon Petroleum and Phillips 66 have decided that more than a third of crude capacity at northern California refineries, which faced the earliest and so far longest travel restriction effects, will exit a market that was already difficult before Covid-19 changed consumer demand.
The 575,000 b/d of capacity earmarked for closure this year had imported 300,000 b/d of crude since 2015, mostly from west Africa, Canada and Latin America. Increasingly tight discounts for medium and heavy sour grades to light sweet benchmark crudes have eroded complex processing advantages. Canadian producers have become more adept at quickly matching production to demand after a year of government curtailments. Heavy Canadian crude values to the US Gulf coast narrowed to discounts of less than $9/bl to WTI in June, short of the level needed to cover the cost of pipeline tariffs. Sour crude also remains unusually strong relative to sweet grades in the Gulf coast. Light sweet WTI Houston has been at a 15¢/bl discount to medium sour Mars since 1 July, compared with a third-quarter average premium of $2.80/bl over the past five years (see graph).
Green rush
US road fuel demand has returned to where it stood before lockdown measures came in, although missing out on the usual summer gasoline peak. US gasoline demand is hovering at around 90pc of year-ago levels. Implied diesel demand has drawn even with 2019 consumption, although low jet fuel demand remains a headwind, as US refiners attempt to bring down their record diesel stockpiles. "We are going to be very disciplined and make sure this light at the end of the tunnel is not a train," PBF Energy chief executive Tom Nimbley says.
Refiners previously eking out a narrow profit — or acceptable loss — must decide whether their operations justify costly and necessary maintenance. Deferring work risks even more expensive, unplanned shutdowns.
US refiners entered the year configured to meet an expected surge in demand for lower-sulphur marine fuel. Stocks instead swelled as refiners adjusted to reduce kerosine production. US Atlantic and Gulf coast inventories have the most ground to cover to return to more seasonally normal levels.
Some refiners are pulling out of petroleum-derived low-sulphur diesel production entirely. Nearly 430,000 b/d of current or former crude refining capacity could cease refining petroleum and convert units to produce over 130,000 b/d of renewable diesel over the next three years. Phillips 66 has announced the largest plans, for about 52,000 b/d of renewables production in 2024 after it stops processing crude at its 120,000 b/d Rodeo refinery in San Francisco in 2023.
| Selected US independent refinery runs 000 b/d | |||
| 2Q20 | 2Q19 | ±% | |
| Marathon Petroleum | 2,165 | 2,937 | -26 |
| Phillips 66* | 1,660 | 2,114 | -13 |
| Valero | 1,781 | 2,226 | -32 |
| PBF | 675 | 854 | -21 |
| HollyFrontier | 350 | 453 | -23 |
| *throughputs for global system | |||
