Demand for gasoline in the US is now down 50-60 per cent versus 2019 levels, hitting decade lows as covid-19 destroyed transport fuel demand, reported the Bank of America in its latest BofA Global Research report.

The implosion of demand has quickly turned gasoline from refiners' golden child to their Achilles heel, it added, noting that just as China struggles to return to normal following a prolonged lockdown, Europe, the US, and India are entering into their own quarantine periods.

Extreme virus containment efforts have decimated transportation fuel demand. EIA data showed US gasoline demand plummeted roughly 3 million barrels per day (b/d) or 33 per cent over the last two weeks. Since then, even more states have gone into lockdown, suggesting that demand has worsened further.

As demand collapsed at an unprecedented pace, RBOB-Brent cracks followed suit, crashing below -$8 per barrel (/bbl). Refiners globally have been quick to respond to the breakdown in transportation demand, throttling back runs across all regions.

In the US, refiners cut crude inputs by about 1 million b/d, and refiners and blenders managed to lower gasoline output by nearly 2.5 million b/d in just two weeks. Yet, this has not been sufficient to stem gasoline inventory builds, which are now sitting at new seasonal five year highs across the US, Singapore, and the ARA. Additional run cuts are likely needed in the coming weeks to keep inventories from ballooning counter-seasonally.

Idle capacity to cap RBOB cracks until transport recovers

Refiners have not only cut runs, they have swung yields massively towards diesel thanks to the increased flexibility due to lower CDU utilization. Diesel remains the lynchpin for margins, and refiners are producing as much of it as possible. Last week, US diesel output came within reach of the five year seasonal highs even as refinery runs fell to five year seasonal lows.

Refiners also likely pushed more low sulphur vacuum gasoil into the fuel oil pool instead of using it for FCC gasoline, which likely contributed to weaker but still positive VLSFO cracks. A return of idle capacity and yield shifts back to gasoline should cap any recovery in RBOB cracks. Yet, if diesel demand falters, higher RBOB cracks may be needed to incentivize refiners to continue running, the BofA Research report said.

US run cuts create the illusion of strong margins

As refiners in PADDs 2, 3, and 4 cut runs and reduced their crude oil purchases, oil supplies are backing up in-basin and at remote trading hubs, leaving barrels temporarily stranded. As a result, spot crude differentials have blown out across the US and Canada and refining margins have rebounded, giving the appearance of stronger demand. In reality, these margins are only possible because refiner demand is low. If oil production begins to fall or refiners ramp up runs, margins will collapse absent a recovery in refined product demand.

But as global unemployment balloons, a swift gasoline demand rebound seems less and less likely. In addition to falling crude oil production, the global oil balances are receiving help from biofuel plant shut-downs. In just two weeks, US ethanol production fell 200,000 b/d and more curtailments are likely if margins remain negative. – TradeArabia News Service