U.S. Refiners Shifting Focus to Distillates Amid Energy Transition

As U.S. refiners rejigger operations to reflect declining domestic motor fuels demand in the next decade, they will seek to maximize diesel and biofuels production for exports, industry analysts say.

A rationalization of global refining capacity along with Russia's continued war in Ukraine has encouraged U.S. refiners to prioritize distillates as global diesel inventories sagged and demand jumped.

At its peak last year, U.S. refiners were exporting a record 1.57 million barrels per day of distillate fuel, with profit margins topping $70 a barrel, more than double that of gasoline.

While distillate margins have cooled to around $31.35 a barrel, according to analysts at Tudor, Pickering and Holt, they remain double the five-year average.

Those profits will encourage downstream companies globally to invest in producing diesel and other high-value products, said John Auers, managing director of Refined Fuels Analytics.

"The refineries that will be most at risk in the future will be those that are geared to produce more gasoline," Auers said in remarks at the American Fuel & Petrochemical Manufacturers annual meeting in San Antonio.

Gasoline demand per capita has been declining in the United States for much of the 21st century, due to increased fuel efficiency of engines and rising share of electric vehicles.

In contrast, Auers forecasts that total middle distillates demand will increase by 10.8 million barrels per day (bpd), or 32%, by 2045, with diesel growing by 4.8 million barrels and jet fuel by 6 million barrels.

Transportation fuel production growth will be focused on biofuels. Oil refiners such as Marathon Petroleum and Phillips 66 have been retrofitting oil refineries to produce biofuels such as renewable diesel and sustainable aviation fuel.

U.S. production of renewable diesel topped 100,000 bpd in 2022, more than double 2021's production level, according to data compiled by Refined Fuel Analytics.

The U.S. will become an important biofuels exporter, likely the world’s largest, of sustainable aviation fuel and renewable diesel by 2025, Auers said.

(Reporting by Laura Sanicola; Editing by Jonathan Oatis)