HollyFrontier cuts refinery runs to 70% as coronavirus pandemic eats away at gasoline demand

HollyFrontier said it has cut rates to 70% at its refineries as it looks to manage demand destruction brought upon by the coronavirus pandemic.

HollyFrontier has five refineries—two in the Rockies, one in New Mexico, and two serving the Group 3 market of the Midwest—with a total crude refining capacity of 514,630 b/d, according to US Energy Information Administration data.

"Over the last several weeks, refiners across the US have been struggling with plummeting demand for fuels, particularly gasoline and jet fuel as direct consequence of the COVID-19 outbreak," said Lenny Rodriguez, an analyst with S&P Global Platts Analytics.

"This has hurt product cracks and, in turn, refining margins are under severe pressure," he added. "As a result, a number of refiners in the US have started discretionary runs cuts, the latest being HollyFrontier."

V IS THE PROBLEM

Inland refiners in Midwest and Rockies markets are faced with a dilemma: While they have access to cost-advantaged crudes which cuts their crude costs, they have no access to markets outside of their region for the gasoline and diesel they produce.

"In the near term, the most important factor driving low margins and refinery utilization in PADDs 2 and 4 is the lack of local demand and limited ability to access other refined products markets," according to recent Turner Mason blog "We're Not Gonna Take It," by John and Robert Auers.

This lack of demand has cut runs across the region.

Weekly EIA data shows refinery runs in the Midwest's PADD 2 dropped to 74.2% in the week ended April 3, down 7.2 percentage points. Midwest PADD 2 is made of up of two markets, Chicago and Group 3, which serves the western Midwest.

Last week's data shows the region's total gasoline production fell by almost 300,000 b/d to 1.45 million b/d, and stocks rose by 2.6 million barrels to 60.5 million barrels despite lower output.

Stocks of ULSD, or X grade, dipped by 300,000 b/d to 29 million barrels, despite a slight rise in production, which was 19,000 b/d higher at 1.034 million b/d, supported by agricultural demand which has kept prices firm.

"X is fine. V is the problem," said one Midwest trader, using the Group 3 term of V grade for suboctane gasoline.

"They are leaning on dudes to puke the V. That is what happened to basis. We will probably get another round of selling today as minimums [were] reallocated last night," he added, referring to minimum shipper volumes on the Magellan pipeline system.

As the ULSD crack holds up better than that of gasoline, Platts Analytics notes that refiners are incentivized to shift their slates toward diesel and away from gasoline.

Actual volumes of gasoline on the Magellan pipeline system moving from the US Gulf Coast up through the Midwest to Minnesota were not disclosed, said Bruce Heine, a spokesman for Magellan, who noted "our gasoline inventories are robust at this time."

COULD DEFER PLANNED REFINERY WORK

In an effort to contain the spreading of coronavirus, HollyFrontier, like most of its refining peers, is limiting onsite staff to essential personnel, "carefully evaluating projects at the refinery and limiting or postponing non-essential projects and contractor work," the company said in a statement.

Following extensive maintenance in Q4 2019 at its El Dorado, Woods Cross, Utah, and Cheyenne plants, HollyFrontier had a "light planned maintenance schedule" for 2020, head of commercial operations, Tom Creery, said February 20 in an earnings call.

"We expect to run between 425,000 b/d and 435,000 b/d in the first quarter of 2020," he said.

HollyFrontier has reduced capital spending by about 15% to between $525 million to $625 million for the year, below the previously announced guidance of $623 million and $729 million. However, it will proceed with the construction of a renewable diesel plant at its Artesia refinery in New Mexico.

The plant was in early construction as of the fourth-quarter earnings call, and is expected to process soybean oil and other renewable feedstocks into renewable diesel. Production capacity is 125 million gallons/year, with the commissioning date set for Q1 2020.

But as the impacts of the coronavirus pandemic on demand and the refining sector continue to unfold, there could be further adjustments to its plans.

"HollyFrontier will continue to evaluate market conditions and make further changes as circumstances dictate," the company said.