Where Are You Going - What's Next for the U.S. Refining Sector?

For U.S. refineries, the severe demand destruction that occurred this spring led to the worst financial performance in recent history. Not only did refiners produce less diesel, motor gasoline, and jet fuel in the second quarter than any quarter in recent memory, their refining margins were sharply lower than the historical range — a one-two punch that hit their bottom lines hard. The situation has improved somewhat this summer, but it’s still tough out there. So tough, in fact, that it’s reasonable to ask, does the coronavirus and its impacts to the energy sector signal the end of an era for refiners across the U.S.? Today, we review the decline in fuel demand and profitability in the second quarter and discuss the uncertainties refiners face in the second half of 2020 and beyond.

RBN has blogged extensively over the past few months about the upheavals that COVID has caused in every part of the energy industry. The pandemic’s effects on refining were first explored in Strange Brew in late March, where 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. Then, in our three-part Baby Break It Down series in April and May, we detailed what refiners were doing to reduce their overall output and minimize their gasoline and jet fuel production to help return refined-product demand and supply into closer balance. Now, in the middle of what used to be known as “the summer driving season,” we examine where things currently stand for refineries, and what likely lies ahead.

Fuel Demand

To better understand what led to the severe decline in refiner profitability in the second quarter, we first look at demand for gasoline — by volume, the #1 product of U.S. refineries (approximately 50% of total output). With the country going into lockdown as the winter of 2019-20 was winding down, vehicle miles traveled (VMT) plummeted by an almost unimaginable 41% from February through April. VMT rebounded modestly in May as stay-at-home restrictions eased and states tentatively re-opened, but still remain well below the historical average. As a result, 27% less gasoline product was supplied during the second quarter of 2020 (red line in Figure 1) compared to the same period last year (blue line), according to the Energy Information Administration (EIA). The good news is that gasoline “product supplied” –– a proxy for demand –– continued rebounding in June and July and is now approaching the bottom edge of the 10-year range (gray-shaded area).

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