US refiners shift into maximum diesel mode as gasoline prices dip below $1/gal

New York — US refiners are getting slammed by falling demand for petroleum, but some are faring worse than others depending on location and ability to increase distillate output as the diesel-to gasoline spread hits a 10-year high and some retail gasoline prices fall to 21-year lows.

Contrary to the shift to maximum gasoline mode usually seen at this time of year to prepare for summer drivers taking the road, refiners are now producing as much diesel as they can due to better demand as they cut back significantly on utilization as stay-at-home orders to keep the coronavirus from spreading mount.

US gasoline demand fell to 6.7 million b/d for the week ended March 27, down from the 8.8 million b/d the week earlier, US Energy Information Administration data showed. Conversely, distillate demand rose to 3.9 million b/d from 3.8 million b/d in the same time period.

The crack between front-month NYMEX RBOB-ULSD contracts averaged minus $15.08 for the month of March, with the back half of the month dropping off significantly.

"Over the past week, US average diesel cracks have traded out to a $24/b premium vs gasoline cracks, representing the widest gap since 2011," Tudor Pickering Holt analyst Matthew Blair said in a research note.

Blair notes US gasoline cracks are at new 5-year lows as stay-at-home orders have kept drivers off the road.

And as refiners continue to pare back runs, "wide-scale refinery run cuts are likely to limit supply" of diesel, he said.

US refinery utilization have fallen 5 percentage points to 82.3% as crude inputs to refineries dropped below 15 million b/d, EIA data showed.

USGC CRACKS POSITIVE; USWC SLAMMED

EIA data shows for the week ended March 27, US Atlantic Coast refiners increased output of ULSD to 232,000 b/d from 199,000 b/d the week earlier, while cutting back gasoline production by almost 981,000 b/d, which helped pull gasoline cracks back into positive territory.

USAC ULSD was supported by the shutdown of Newfoundland's 137,000 b/d Come by Chance refinery earlier this week due to the impact of coronavirus. The plant was a steady supplier of ULSD to the USAC.

The US Gulf Coast produced 1.9 million b/d of gasoline the week ended March 27 compared with the 2.26 million b/d in the week ended March 20, as demand at home and abroad cut exports to Latin America. ULSD output rose to 2.7 million b/d from 2.5 million b/d in the same time frame.

US West Coast cracks for gasoline slid deeper into negative territory last week despite best efforts by California refiners, which cut runs by 12.9%, according to the Weekly Fuels Watch report released by California Energy Commission. For the week ended March 27, California refiners cut both CARB gasoline and CARB diesel production by 25.2% from the week earlier.

MORE DOWNSIDE FOR MIDWEST REFINERS

As the coronavirus makes its way inland from the coasts, already beleaguered Midwest refiners are likely to cut runs even further, as they lack the coastal and/or pipeline access to move gasoline and diesel out of the region.

Chicago gasoline cracks fell into negative territory in mid-March, while ULSD kept its value, ahead of the spring harvest season. As a result, Midwestern refiners pruned back gasoline production sharply, by over 600,000 b/d to 1.75 million b/d for the week ended March 27.

TPH's Blair noted amid the recent sell-off in crude and the even more dramatic drop in spot gasoline, there are now gas stations in 11 states offering gasoline for 99 cents/gal or cheaper, according to GasBuddy.com.

Most of these stations are located in the Midwest—Minnesota, Michigan, Wisconsin, Ohio and Tennessee, Oklahoma and Nebraska—but also include some USGC locations.

"The last time that US regular clocked in at less than $1.00 was all the way back to 3/15/99," wrote Blair.

But because much of the Mid-Continent has no stay-at-home orders in place or they were issued at the end of March, later than coastal states, it is likely gasoline cracks there will fall further.

However, ULSD output also slipped, which kept diesel cracks stronger as increased agriculture demand looms. For the week ended March 27, EIA data showed Midwest plants produced 1.02 million b/d of ULSD compared with the 1.06 million b/d the week earlier.