LONDON (Reuters) - Petroleum consumption is rising around the world as the major economies exit from lockdowns imposed to control the coronavirus epidemic, but the uneven recovery presents challenges for fuel refiners.
Refiners must cope with a much stronger rebound in demand for gasoline compared with diesel and jet fuel, reconfiguring their equipment to shift the yield towards light distillates and away from middle distillates.
The epidemic and measures introduced to control it have reduced petroleum consumption in three ways, with varying implications for the scale and speed of the recovery in fuel use:
First, the direct and indirect effects of mandatory lockdowns as a result of stay-at-home orders and the closure of some businesses, which sharply reduced personal mobility.
Formal lockdowns had the largest immediate impact on oil consumption because they hit personal movements, with the main impact on gasoline, the dominant motor fuel in all regions outside Europe.
But most mandatory lockdown measures have now been reversed, or eased, which has led to a big increase in mobility and gasoline consumption compared with early April, when lockdown measures were most intense.
Second, the effects of voluntary behaviour changes, as individuals attempt to avoid crowded environments with a high risk of virus transmission.
Behaviour changes have mostly involved avoiding mass transit systems and passenger aircraft, ensuring the largest impact has been felt on jet fuel.
Behaviour changes have proved longer lasting, with scheduled flights and jet fuel consumption still down by around 50% compared with before the epidemic.
Senior airline executives expect passenger volumes to remain below pre-pandemic levels at least through the rest of 2020 and 2021, so jet consumption will be reduced in the medium term.
Third, the macroeconomic effects of lockdowns and voluntary behaviour changes on household consumption and business investment, as consumers and firms respond to lower incomes and sales.
The epidemic and lockdowns have triggered a business cycle downturn, which will hit diesel especially hard since this is the fuel mostly commonly used by manufacturers and freight transportation firms.
Business cycle downturns take time to reverse fully, so there will be a hit to diesel consumption through the rest of 2020 and into 2021.
Light distillates (gasoline) were the most severely impacted by the first phase of the epidemic, but have also recovered fastest as lockdowns have eased.
Middle distillates (predominantly diesel but also jet) were less impacted in the first phase, but are now recovering more slowly and will be harder hit for the rest of 2020 and 2021.
As a result of these dynamics, refining margins for gasoline collapsed in late March and early April, turning negative for a time, but have since rebounded close to pre-pandemic levels.
By contrast, middle distillate margins have been gradually weakening since the start of the year on a deteriorating economic outlook and show no sign of a significant recovery.
Responding to both price signals and filling storage tanks, refiners slashed light distillate production at the height of the lockdown in favour of middle distillates – before sharply reversing course in recent weeks.
In the United States, refiners typically make around 1.5 times more gasoline than jet and diesel combined. But the ratio fell to 1:1 at the start of April before surging to almost 1.7:1 last week.
Gasoline is the largest output and principal revenue-earner for most refineries in the United States, so it dominates the decision about how much crude to process.
At the height of lockdown, refineries slashed their crude processing to avoid producing too much gasoline with no room to store it.
As the lockdowns have eased, however, refineries have ramped up their crude throughput to meet recovering gasoline demand.
The consequence has been the production of too much middle distillate, which has further weighted on diesel margins.
By restraining crude processing over the next couple of months, refiners should be able to reduce both gasoline and diesel inventories.
But the degree of normalisation is likely to be greater for gasoline than diesel, which will leave middle distillate margins struggling.
John Kemp is a Reuters market analyst. The views expressed are his own.
- U.S. refiners restrain processing to work down excess fuel stocks (Reuters, June 25)
- U.S. gasoline consumption rebounds, jet stays depressed (Reuters, June 12)
- Stuck with too much diesel, U.S. refiners need to restrict runs (Reuters, June 4)
Editing by Mark Potter
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