REFINERY MARGIN TRACKER: Will US refiners have to cut back runs again?

New York — Efforts by US refiners to keep refinery runs in line with demand and not overwhelm the green shoots of gasoline and diesel recovery have been successful to a degree, but a continued rise US Covid-19 cases could presage a return to lockdowns and run cuts, an S&P Global Platts analysis showed July 27.

US Gulf Coast cracking margins for WTI MEH averaged $5.50/b for the week ended July 24, Platts Analytics data showed, up from the $4.21/b averaged over the second quarter. USGC coking margins are also stronger, with Mars averaging $3.33/b last week, up from $2.45/b over Q2.

"We expect to see a gradual recovery through the month of July as product demand continues to recover. However, there is a concern that renewed efforts to slow the spread of Covid-19 could lead to new cutbacks in the weeks ahead, a situation we will be closely monitoring," according to S&P Global Analytics.

When Valero kicks off second quarter earnings period for US refiners on July 30, the company's quarterly results will give a glimpse of just how deeply its operations and financials were impacted by the pandemic and offer some direction as to how the third quarter is shaping up for demand.

Valero operates some of the most sophisticated and complex refineries on the US Gulf Coast, and benefits from availability of domestic light, sweet domestic crudes.

Starting in mid-March, large swathes of the US were mandated to lockdown to prevent the spread of the deadly virus, drastically cutting gasoline demand. Refiners responded quickly to shut down units, and even whole plants, pushing down US refinery runs to 70.2% in April, the lowest utilization since 1985, according to Energy Information Administration data.

But US gasoline demand has improved. The US Energy Information Administration pegged implied demand for gasoline at 8.55 million b/d for the week ended July 17, up from the 5.853 million b/d averaged in April.

US Midwest refiners have shown the most progress. After falling to 69.6% in April, runs started to rise and averaged 86% for the week ending July 17, EIA data showed. Many Midwest states have less rigorous mandates in place limiting activity than other regions.

Midwest cracking margins for Bakken ex-Clearbrook averaged $5.33/b for the week ended July 24, up from $3.54/b over Q2. Coking margins also rose, with benchmark Western Canada Select margins averaging $3.30/b, up from $2.66/b over Q2.

USWC utilization threatened

With California largely returning to lockdown status, US West Coast utilization rates are the most at risk. California was the first state to go into lockdown in March, but the subsequent easing of restrictions triggered a flare up in Covid-19 cases.

This drop in demand forced Marathon Petroleum to shutter temporarily its Martinez, California plant, in an effort to keep supply and demand in balance.

USWC cracking margins for Alaska North Slope averaged $9.21/b for the week ended July 24, compared with the $8.42/b over Q2.

Valero operates two refineries in California -- a 145,000 b/d refinery in Benicia, California, serving the San Francisco Bay area and a 91,300 b/d facility in Wilmington, just outside of Los Angeles.

While margins remain healthy, the return to lockdown does not bode well for the California refiners.

"With California again in a lockdown, West Coast will most likely be a headwind for 3Q 20 earnings. We see need for capacity rationalization in California to bring S/D [supply/demand] back in balance," wrote Manav Gupta, Credit-Suisse analyst in a recent research note.