Baby Break It Down - How Much Can Refineries Slow Their Operations Without Going Offline?

Sharply declining refinery demand for crude oil was a key driver in the historic collapse in near-term futures prices for WTI at Cushing earlier this week. With stay-at-home directives in place in most of the industrialized world, U.S. — and global — demand for motor gasoline and jet fuel has plummeted to levels not seen in decades. These changes in refined-products demand, which may continue for months, already are having significant impacts on U.S. refineries — not just in how much crude oil they need but in operators’ decisions on whether to adjust their crude slates and ramp down or alter their operations. Their urgent challenge is to revise their yields to something close to the appropriate volumes of gasoline, diesel and jet fuel. Today, we begin a blog series on the U.S. refining sector and what refiners can — and can’t — do to adapt to these extraordinary times.

You’d be hard-pressed to find an energy company of any sort that hasn’t been deeply affected by the events of the past few weeks, including the recent collapse in front-month and second-month futures prices for WTI at Cushing. As we said in Figure It Out, the old expectations regarding production volumes, pipeline flows, exports and commodity prices have been discarded. Producers, midstreamers and others have been adjusting to “the new normal”: an era of reduced output, fiercer competition and lower prices. Refineries are by no means exempt from the market convulsions now under way. In Strange Brew, we explained that even before the initial coronavirus outbreak in China started to grab headlines around New Year’s Day, refineries in the fourth quarter of 2019 and first two months of 2020 had been incentivized to shift their refined products output toward diesel, which can be used to help make IMO 2020-compliant low-sulfur bunker. Now, with the COVID-19 pandemic all but shutting down North American and European economies — and slashing gasoline and jet fuel demand in the process — the price signals are even stronger. Put simply, refineries are doing everything they can to reduce their overall output, minimize their gasoline and jet fuel production in particular, and enter what you might call “max diesel mode.”

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That raises a critically important question: How much operational flexibility does a refinery really have? The simple answer is that there are a number of things that a refinery operator could do in response to a situation like the one facing the refining sector today:

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