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US refiners eye a better Q3, but keeping a close eye on Covid-19 resurgence

Highlights

Platts Analytics sees US refining capacity improving in July

Virus resurgence could limit near-term recovery

US refining margins have improved thus far in Q3

New York — Even though third quarter refined product demand has rebounded as lockdown restrictions across much of the US have loosened, refiners are aware that any Covid-related resurgence could interrupt this recovery and further reduce gasoline and diesel demand.

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The look ahead into Q3 comes on the heels of a brutal Q2, where US refiners tightened spending, cut back refinery runs and rushed to capital markets as they wrestled with the drastic demand drop.

"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 COVID-19 could lead to new cutbacks in the weeks ahead," according to S&P Global Platts Analytics.

Platts Analytics expects 4.465 million b/d of US refining capacity will be offline in July, compared with the 4.571 million b/d off line in June. But these estimates are well above the 1.717 million b/d offline in July 2019, the height of the summer driving season, when most refiners typically run flat out.

US drivers stalling out

The latest weekly US gasoline implied demand was pegged at 8.55 million b/d for the week ended July 17, up from the 5.853 million b/d averaged in April, according to the US Energy Information Administration.

But cases of coronavirus are also on the rise. The US shows a 24% rise in new cases over the last 14 days, according to the New York Times.

The TomTom Traffic Index -- which measures urban traffic congestion -- held at 20% for the third week in a row, according to Tudor, Pickering, Hold & Co. analysts. But overall national traffic congestion is about one-third of 2019 levels, as working from home and growing unemployment reduces rush hour traffic.

"While the 40-city average has held flat, individual cities continue to fluctuate from week to week as COVID-19 case numbers and restrictions develop," TPH analyst Matthew Blair said.

TPH notes Baltimore, Maryland, traffic congestion rose to 35% this week from the 14% the week earlier, while New York Times data shows a 71% increase in the state's new coronavirus cases over the past two weeks.

While Platts Analytics currently expects third quarter US gasoline demand to rise to 8.47 million b/d, from the 7.14 million b/d in the second quarter, those estimates could change. If coronavirus cases continue to rise in Texas, California and Florida – three of the largest gasoline using states – drivers may opt to stay off the road.

Distillates: a wide gap to bridge

Demand for distillates, which didn't suffer as dramatically as gasoline in the second quarter, is expected to average 3.65 million b/d in Q3, compared with the 3.54 million b/d in Q2, Platts Analytics forecasts showed.

Diesel is used by truckers and railroads, and can be used as a proxy to measure economic health.

While the Cass freight index -- which measures North American freight volumes -- showed a 3.5% improvement in June over Mays, the amount of freight moved in June 2020 was a disappointing 18% below last year's levels.

"We were thinking the June rebound would have been stronger, based on what we're hearing on the trucking side and what we've been seeing with respect to rail traffic and with the ISM Index now back greater than 50," Cass said. "In our view, U.S. freight volumes (the amount of "stuff" moving around the country) will not return to 2019 levels until 2021 at the earliest."

Jet fuel demand suffered the most, as air travel came to a standstill as restrictions were put into place. Demand for jet fuel fell to 691,000 b/d in April, according to the EIA, as refiners cut jet yields and resorted to mixing jet into the distillate pool.

While EIA data shows recent improvements in US jet demand -- which came in at 1.078 million b/d for the week ended July 17 -- demand remains stagnant. US Transportation Security Administration data shows the number of passengers moving through TSA checkpoints declined to 664,000 last week, down 4% week on week.

TPH analyst Matthew Blair notes this is the first decline since weekly improvements began in late April, "likely driven by recent surge in COVID cases in the US."

Margins on the bubble

Nevertheless, Q3 refining margins are up generally up across the country, reflecting higher demand for products. But some analysts expect US West Coast refiners, particularly those in California, to see weaker earnings than other parts of the country as coronavirus cases surge.

"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 back in balance," Credit-Suisse analyst Manav Gupta said. "We see the need for capacity rationalization in California to bring S/D [supply/demand] back in balance."

However, he notes that despite a rise in cases, both Florida and Texas are not enforcing lockdowns "which is good for PADD 3 product demand."