Refinery margin tracker: Global margins rise as coronavirus lockdown restrictions ease and product demand returns

Global refining margins are gaining upward momentum as governments ease lockdown restrictions thus improving product demand, an analysis from S&P Global Platts showed Monday.

In the US, roughly 90% of the country is under some form of lockdown to slow and prevent the spread of the deadly coronavirus.

But as the infection curve slows and the number of states easing restrictions rises from 16 to 32, it is expected quarantined residents will be anxious to get back on the road. And retail gasoline prices 40% lower than last year offer additional enticement to get them behind the wheels of their cars.

Roughly 35% of gasoline used is driving to and from work. So as US workers trickle back to their jobs, May gasoline demand is expected to increase by 1.234 million b/d over April, S&P Global Platts Analytics forecasts.

"In short, we expect that re-opening orders will account for roughly 70% of the forecast increase in monthly, leaving the remaining roughly 30% to occur derivatively from re-opening or simply because car drivers -- out of a reduced level of fear or bored or cabin fever -- wish to get out," according to a recent Platts Analytics note.

US REFINERS CUT PRODUCTION TO MATCH DEMAND

As lockdowns were imposed and gasoline demand fell fast and far, big refiners like Marathon Petroleum, Phillips 66 and Valero took immediate action to shut down gasoline-making units and curtail run rates at their plants. Energy Information Administration data showed total US refinery runs for the week ended April 17 at 12.8 million b/d, nearly 21% lower than the year earlier.

"We reduced refinery runs across the system in response to lower product demand and runs," Phillips 66 CEO Greg Garland said on Friday's first quarter results call, adding that April's refining utilization was in the high 60% range.

Phillips 66 sees coronavirus-related US demand destruction rise from its mid-April 70% level to about 35% in early May.

Landlocked refiners in the US Midwest with no outlet for their products initially absorbed the greatest blow as margins tumbled into negative area. But quick action by refiners cut refinery utilization to 43% of capacity in mid-April pulled margins out of the red into the black.

"It's just now we see the Mid-Continent has sort of bottomed out," said Valero's head of refining, Lane Riggs, on Wednesday's first quarter results call.

Margins bear that out.

Midwest cracking margins for Bakken rose from minus $1.03/b for the week ended April 24 to $5.28/b in the week ended May 1, while coking margins for WCS moved from mines $3.59/b to $4.80/b during the same time period, Platts Analytics margin data showed.

MARGINS FOR US WEST COAST REFINERS ALSO SHOWING MARKED IMPROVEMENTS

Despite coastal access, regionally mandated gasoline and diesel specifications create a landlocked refined product supply and demand system on the USWC. The temporary shutdown by Marathon of the 161,500 b/d Martinez, California, refinery helped pull regional margins back into positive territory.

USWC cracking margins for Alaska North Slope averaged $15.66/b for the week ended May 1, a huge jump from the negative $9.75/b the week earlier. Coking margins also move out of negative territory, with Vasconia margins averaging $5.24/b, up from the minus 9 cents/b during the same time period, Platts Analytics data showed.

This strong rebound has Valero planning on running its USWC plants at about 77% of capacity in the second quarter, above its anticipated average 70% system-wide refinery utilization for the quarter, as it cautiously matches demand with increased supply.

LINE OF SIGHT TO EUROPE

Phillips 66, which has refining and retail operations in Western Europe, has seen demand destruction there rise to 50% today from 70% in mid-April when it was at its worst.

"In Germany and Austria, they're starting to open up those communities a little bit. Bigger stores can now open," Brian Mandell, Phillips 66's head of commercial operations said on Friday's results call.

ARA cracking margins for Nigerian Bonny Light rose to $2.53/b for the week ended May 1, up from the $1.29/b the week earlier. Arab Light cracking margins dipped week on week, to $6.98/b compared with the $7.95/b, but still outperformed Bonny and other crudes.

Mediterranean margins remained dismal, but are likely to climb out of the doldrums as countries cautiously ease restrictive mandates.

Italy, the hardest hit European country in terms of coronavirus-related deaths, sent over 4 million workers back to work Monday after seven weeks of restrictions.

CPC cracking margins averaged $1/b for the week ended May 1, compared with the $4.39/b the week earlier, while Arab Light margins drifted down to $1.19/b from $1.86/b during the same time period.