U.S. Refining Margins Slump on Coronavirus Concerns

Reuters, March 2, 2020

U.S. refining margins plunged this week on demand fears due to the coronavirus outbreak, hurting an already weak distillate market and reversing gasoline margins that had been unexpectedly strong in recent weeks. Margins for refining both diesel and gasoline slumped this week as investors have fled risky assets as the coronavirus spreads. The outbreak has ignited fears that it will weaken the global economy and affect sectors like transportation. Diesel margins had been weaker as the outbreak spread through Europe, which uses more diesel fuel.

Distillate margins HOc1-CLc1 fell as low as $13.44 a barrel on Thursday, lowest for this time of year since 2016, according to Refinitiv Eikon data. Usually, margins on distillates are stronger this time of year, boosted by U.S. heating oil usage. The spread rebounded to $17.13 on Friday, still the weakest since 2017. U.S. gasoline refining margins RBc1-CLc1 rose to $21.54 a barrel last week, highest seasonally since 2016, Refinitiv Eikon data showed. But that margin reversed this week, and on Friday it was at $17.50 a barrel, seasonally weaker than at any point in the last decade other than in 2019.

Over the last four weeks, U.S. distillate products supplied, a measure of demand for diesel, jet fuel and other products, was down 5%, according to the U.S. Energy Information Administration. Jet fuel demand worldwide is declining as well, with major Asian airports cutting flights, according to RBC Capital Research.

It’s the perfect storm really,” said Michael Dei-Michei, head of research at JBC Energy in Vienna, Austria. “You have all kinds of issues regarding goods transportation because of weakened industrial activity in China and how that also affects the supply chains elsewhere.

Gasoline margins had been bolstered by refinery unit outages. In mid-February, four refineries in Texas and Louisiana shut units essential to gasoline production, according to refinery sources and energy industry intelligence service Genscape. Those units are in the process of coming back online, however.

Gasoline inventories are still at a healthy 256.4 million barrels, although they have fallen for four straight weeks, U.S. EIA data shows.

Gasoline prices may also be affected by higher costs for octane, trading sources said. Octane prices have risen on demand by refiners to replace octane stripped out of gasoline during the desulfurization process necessary to create gasoline compliant with Tier 3 regulations, which set new vehicle emissions standards and lower the sulfur content of gasoline.

Diesel margins have dropped due to an overall mild winter sapping heating oil demand. In addition, market participants expected a boost in early 2020 to diesel demand from a new international marine fuel law known as IMO 2020. But the new rule took effect with a less-than-expected pull on demand.

(Reporting by Stephanie Kelly and Laura Sanicola; Editing by Dan Grebler)

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