The COVID-19-induced social isolation and subsequent economic slowdown have caused major drops in U.S. refined products consumption, especially gasoline and jet fuel, which have experienced declines of as much as 44% and 70%, respectively, relative to similar periods in 2019. Diesel fuel consumption has been off as much as 20% on the same basis, and given that COVID is a global crisis, product exports have also fallen. As a result, U.S. refinery utilization has dropped to less than 70% for the last few weeks, the lowest levels since September 2008 during Hurricane Ike. All this presents refiners with two challenges: (1) reduced total demand; and (2) the disproportionate decline in gasoline and jet fuel. Each refinery is configured differently and has a varying degree of flexibility to react to these challenges. Today, we discuss what refiners can do to adjust operations and product yields, and examine the point at which some refineries might be forced to shut down completely.
As discussed in Part 1 of this blog series, 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.” There are four levers that a refinery can use to deal with the current situation: (1) adjust its operating conditions, (2) alter its crude slate, (3) ratchet down its utilization rate, and (4) shut down the entire facility. To gain a better understanding of a refinery’s ability to adjust its refined-product output in response to shifting markets, we also discussed the basics of how a refinery breaks down crude oil into component parts or fractions, beginning with atmospheric distillation and continuing with vacuum distillation.
Generally speaking, a refinery’s objective is to break down heavier, more dense components that have larger hydrocarbon molecules into lighter, less dense components that have smaller hydrocarbon molecules. Each refinery has a set of equipment and processes that is used to break down either crude itself or particular crude fractions into component parts — the more sophisticated the refinery, the more breaking down that goes on. Once the breakdown is complete, refineries treat, reconstitute and/or blend these component parts together to make refined products to meet consumer demand. The refinery’s objective is to yield the most valuable mix of refined products possible from a given crude input.
Next, we discuss in some detail what refinery operators can do in response to the extraordinary market conditions they now face.
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