Strange Brew - COVID-19 and the Crude Oil Price Crash Puts the Screws on U.S. Refiners

The collapse in crude oil prices and COVID-19’s very negative effects on global gasoline, jet fuel and diesel demand are putting an unprecedented squeeze on U.S. refiners. Even before the initial coronavirus outbreak in Wuhan, China, started to grab headlines around New Year’s Day, refineries had already 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 spreading to Europe and North America and stifling consumer transportation fuel demand, the price signals are even stronger, pushing refineries to do everything they can to minimize their gasoline and jet fuel production and enter what you might call “max diesel mode.” Today, we discuss how there are challenges and limits to what they can do, and a number of refineries may need to shut down due to lower demand, at least temporarily.

Last Monday, March 16, grumblings started among commodity traders regarding negative gasoline cracks — cracks being the price of gasoline minus the price of crude — on the NYMEX. By the end of that day’s session, crack spreads for Reformulated Gasoline Blendstock for Oxygenated Blending (RBOB) — the benchmark for gasoline trading — had fallen almost 90% to settle below $1/bbl (blue line, left graph in Figure 1). Gasoline prices crashed another whopping 30% on Monday, March 23rd.  Ultra-low-sulfur diesel (ULSD) cracks remained strong at $16/bbl (right graph in Figure 1), but the jet fuel crack spread (not shown), which is usually closely tied to diesel, closed at only $8/bbl. Since then, regional crack spreads for gasoline around the U.S. hovered below $5/bbl and then moved into negative territory.

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