Phillips 66 expects gasoline to lead oil product demand recovery

Phillips 66 expects to see gasoline demand recovering more quickly than distillate demand as stay-at-home orders begin to be lifted across the US.

CEO Greg Garland said on Friday's first-quarter earnings call he suspects the increase in refined product demand is "going to be around gasoline."

"People have been cooped up," he said. "They want to drive. I think they are going to be reluctant to go get in the middle seat on an airplane first."

US gasoline demand, in particular, has been hammered as drivers stay in their homes to prevent the spread of the coronavirus. But as states begin to lift their mandates, particularly high-gasoline-demand states like Texas and Florida, drivers are venturing out on the roads, which bodes well for refinery margins.

S&P Global Platts Analytics noted that based on US Energy Information Administration data, US adjusted gasoline demand rose by 15% week on week, reaching 6.5 million b/d for the week ended April 24.

"This data appears to indicate the initial stages of resurgence in economic activity as states begin to ease lockdown restrictions," according to a recent Platts Analytics report.

REFINERY UTILIZATION GUIDED BY DEMAND

Phillips 66 ran its refinery system in the high 60% range in April, as it sought to match refined product manufacturing with the fall-off in demand.

"We got down to about 65% utilization when demand was at its worse," said Brian Mandell, Phillips 66's head of commercial operations.

Rather than provide its usual refining outlook for the second quarter, the company said refinery utilization "will be adjusted according to market conditions."

So far in the second quarter, Phillips 66 said current US demand destruction is about 35%, up from the 40% for rural areas and 50% for urban areas seen earlier in the quarter.

"In terms of refinery utilization, we are matching utilization with demand," Mandell said. "So as demand moves up, we are moving up our utilization as well."

Mandell noted US refinery yields for gasoline fell from 50% to 44% in the first four months of 2020, while distillate yields rose from 29% to 38%. But said as a refiner, "we continue to watch the cracks carefully."

"Now gasoline is over distillate on the West Coast, so we think about opportunities to move our refineries to make the products that people want," he said.

STRONG DEMAND SIGNAL NEEDED

Phillips 66, like others, shut down gasoline-making units at its refineries beginning in mid-March when demand crashed and stocks built. Bob Herman, the head of refining, said the company has been "pretty careful about how we park the units that we've shut completely."

Herman said Phillips 66 has shut down gasoline-making fluid catalytic cracking units and reformers at some refineries but is "making sure we're ready to run when the signals are there."

"We're going to be pretty careful, though, about not bringing capacity back on too quickly," he added. He noted the last thing anybody wants is to "start it up and shut it down" a couple of weeks later.

As demand in China, the source of the coronavirus pandemic, recovers to about 80% to 90%, it bodes well for other countries which are still recovering.

"Europe and then the US got hit next, and those markets are starting to improve," said Jeff Dietert, Phillips 66's head of investor relations.

Currently, Latin America and Central America are in the throes of shut-downs. Dietert said Phillips 66 is seeing a bit of weak demand there currently.

Phillips 66 exported 160,000 b/d of refined products in the first quarter of 2020, in line with the 157,000 b/d exported in the fourth quarter, but a severe demand drop there could impact refinery runs in the US.

"It's really a holistic approach to demand overall that we're using as a guide to run our refineries at a rate that matches that recovery," Dietert said.