US gasoline inventories will drain faster than normal through the summer gasoline season as refiners keep their equipment focused on diesel production, US independent refiner Phillips 66 said today.
Stronger demand for diesel encouraged by next year's switch to lower sulfur marine fuel specifications would support prices and keep US refiners biased toward diesel production well into the traditional gasoline demand season, executive vice president of refining Robert Herman told the Bank of America Refining conference in New York City.
Refiner margins for selling gasoline compared to benchmark crude recovered in February from negative levels in January. But prices still easily encouraged diesel output, he said.
"The gasoline cracks have come up significantly over the last two, three weeks, but they are still a third of what distillate cracks are," Herman said. "We are going to stay in this distillate-pool-only mode through the driving season, and we will see heavy draws on the gasoline pool through the summer and into the back half of the year."
US refiners expect stronger low sulfur diesel demand in the second half of this year as the global shipping fleet prepares to meet lower-sulfur emissions requirements that begin 1 January 2020. Marpol treaty signatories representing 96pc of global shipping must follow International Maritime Organization (IMO) rules requiring emissions matching 0.5pc sulfur fuel, down from today's 3.5pc sulfur fuel.
US refiners still produce more gasoline than diesel. Phillips 66, which generates one of the highest portions of diesel among large US refiners, at 38pc of total output, still averaged gasoline production of 45pc. Inventories of the fuel became bloated late last year and into January under high refinery utilization and limited demand.
Peers Marathon Petroleum and Valero have recently diverted for marine fuel blending some vacuum gas oil (VGO) normally processed in gasoline-producing fluid catalytic cracking (FCC) units. It would take a large, structural shift in the market to sustain such a switch, Herman said.
"I am not a big believer," Herman said. "It is going to take a really wide price signal, I think, to not put the VGO in crackers."
Refiners expect more significant changes to feedstock costs. Discounts for heavy crudes, relative to more easily processed and expensive light, and for more sulfurous sour crudes, compared to sweet, should widen as the fuel change slashes a market that gave less complex refineries an outlet for higher sulfur products.
US refiners were already processing as much cheaper, US light sweet crude as they could handle, Herman said. But access to heavy, sour feedstocks have withered under US sanctions and Opec-organized export cuts. Western Canadian Select (WCS) prices in Houston, Texas, rose to a record $3/bl premium to Nymex CMA in late February as politics and pipeline access stymied US access to heavy, sour production.
Phillips 66 continued to run as much Canadian crude as possible across its US system — more than 500,000 b/d, Herman said.
"Even at the differentials we saw, with our firm transportation commitments, it still made sense to run heavy in most of our facilities," Herman said.
