Spotlight: Highlighting key energy market insights

This Spotlight from S&P Global Platts Analytics was first published March 31, 2020.

The decision by the EPA to extend the transition to summer-grade gasoline this year to May 20 will lend some support to refiners who are currently experiencing extremely low margins.

With a large number of local authorities across the US mandating non-essential workers stay at home in an effort to restrain the spread of the coronavirus outbreak, US gasoline demand is set to decline an unprecedented 2.8 million b/d YoY in April, according to our most recent forecast. This represents a 30% YoY drop in demand.

The dramatic fall in demand has had an equally dramatic impact on US gasoline cracks. Month-to-date average gasoline cracks in NYH are $7.75/Bbl lower YoY; while on the USGC cracks are $6.40/Bbl weaker YoY. This in turn, has hurt refinery margins to a point where discretionary run cuts are already taking place across the country.

S&P Global Platts Analytics currently projects US refinery runs in April to average 14.4 million b/d. That's 1.9 million b/d lower YoY. PADD III accounts for 955 MB/D of the reduction and PADD I contributes with 370 MB/D.

In this adverse market situation, last Friday (March 27), the Environmental Protection Agency (EPA) announced a series of actions aimed at relaxing the enforcement of environmental laws currently in place. One key step was to grant a waiver delaying the full transition from winter-grade gasoline sales (high vapor pressure specification) to summer grade (low vapor pressure) until May 20th from May 1st normally.

In our view, this delay will allow refiners to make a more cost-effective gasoline blend (more butane mixed in the blend vs. more expensive blendstocks such as alkylate or reformate). As such, depressed prices for winter grade should improve but the kick up for summer-grade barrels will likely not be as strong.

With much lower demand, it has likely been harder than usual for refiners and blenders to empty tanks of winter-grade material. The RVP waiver would allow holders of the last remaining barrels of that material more time for disposal. In effect, this allows refiners to reduce inventory of previously "hard to use" material that has been inflating US inventory reports and could even allow for stocks to decline in some cases.