By Rebecca Elliott
U.S. fuel makers slashed production during the second quarter as
they reeled from a historic decline in demand for gasoline and jet
fuel.
Long a bright spot in the oil patch, refiners such as Valero
Energy Corp., Marathon Petroleum Corp. and Phillips 66 pumped the
brakes as the coronavirus pandemic kept people off the roads and
out of the skies, crushing demand for the fuels they produce.
U.S. consumption of gasoline and distillates including diesel
has rebounded from its April trough to more than 90% of year-ago
levels, Energy Information Administration data show. But demand for
jet fuel remains anemic, at little more than half of last year's
level, a sign that global oil demand is likely to remain depressed
for years.
World-wide, fuel makers have coped by processing far less crude,
shutting down some facilities and constraining spending. This
year's average global refinery utilization rates are expected to be
the lowest in 37 years, according to the International Energy
Agency. Refiners typically make less money when they operate well
below capacity because the cost of running their facilities doesn't
decline by much.
In the latest sign of pressure on the sector, Marathon told
employees Friday that it has no plans to restart two refineries
that it idled in April. Marathon on Sunday evening also announced
that it was selling its gas-station business to the owner of the
7-Eleven convenience store chain for $21 billion in the largest
U.S. energy-related deal so far this year.
U.S. refiners' second-quarter results provide a glimpse of the
challenging future that fuel makers face as tougher fuel-efficiency
requirements and electric vehicles threaten their businesses. That
is the reality already facing refiners in Europe, where demand for
transportation fuels had fallen even before the pandemic.
"To a degree, the pandemic is a harbinger of the coming energy
transition more broadly, where oil demand declines year after
year," said Kurt Barrow, a vice president at analytics firm IHS
Markit.
Phillips 66 ran its refineries at 75% of capacity during the
second quarter, down from 97% in the same period a year earlier.
Its refining business lost $878 million pretax during the period,
whereas in the year-ago period it generated $983 million in pretax
profit.
The company's margin on each barrel of oil that it processed
fell to $2.60 from $11.37 a year earlier. That contributed to a
second-quarter loss of $141 million, compared with profit of $1.4
billion in the year-ago period.
Valero processed some 22% less crude during the second quarter
than it did a year earlier, and its margin per barrel fell to $5.10
from $9.58. The company largely reversed the $2.5 billion inventory
write-down that it took during the first quarter, as oil prices
roughly doubled from the end of March to the end of June.
That reversal helped to lift Valero's second-quarter profit to
$1.3 billion from $612 million in the year-ago period. Excluding
one-time adjustments, the company reported a $504 million loss,
compared with $665 million in profit during the same period last
year.
Valero executives said the company is refining more oil to meet
improving demand but cautioned that jet-fuel consumption remains
severely depressed.
"That would be the only sign that we're seeing that's a little
bit troubling," Valero Chief Commercial Officer Gary Simmons told
investors last week.
Many observers expect jet-fuel consumption to remain low for
years, as people avoid flying because of the coronavirus and
businesses conduct more meetings by videoconference, constraining
global oil demand.
By the end of next year, the IEA expects world oil consumption
will be about 2% below levels from late 2019. Some refineries
likely will have to shut down, much as they did after the 2007-09
recession, when some eight million barrels a day of refining
capacity permanently closed, according to the IEA.
"There is going to be continued rationalization," Thomas
Nimbley, chief executive of New Jersey-based PBF Energy Inc., told
investors last week.
PBF ran about 21% less oil through its systems during the second
quarter than it did a year earlier as its margin on each barrel
plummeted to $1.54 from $9.10. The company generated $413 million
in second-quarter profit versus a year-ago loss of $22 million,
thanks in part to asset sales and an increase in inventory
value.
Mr. Nimbley said PBF is focused on weathering the pandemic and
reducing debt, at which point it will look to diversify into areas
such as renewable diesel, a fuel made from products such as
vegetable oil or grease.
Refiners are increasingly interested in alternative fuels.
Marathon, for example, is considering converting one of the
refineries it closed this spring to a facility that produces
renewable diesel.
Marathon ran its refineries at 71% of capacity during the
quarter, down from 97% during the same period a year earlier. Its
margin-per-barrel declined to $7.13, from $15.24 a year
earlier.
The company partially reversed a $3.2 billion inventory charge
it took earlier this year, helping to lift first-quarter profits to
$9 million, compared with $1.1 billion a year prior. Excluding
one-time adjustments, Marathon had a quarterly loss of $868
million, compared with a $1.1 billion profit a year earlier.
IHS, the analytics firm, expects global oil consumption will
surpass 2019 levels in 2023 and continue to grow at least through
the end of the decade, yet remain far lower than it would have been
had the pandemic never happened. Others such as Rystad Energy think
world oil demand will peak before the end of the decade as electric
vehicles gain market share and people travel less.
Either scenario is challenging for fuel makers.
U.S. refining companies raked in cash in recent years, despite
relatively flat domestic fuel consumption, because of an uptick in
exports and a shale boom that outpaced domestic pipeline
infrastructure. Soaring production created crude bottlenecks in
pockets of the U.S. and regional price dislocations that fuel
makers took advantage of.
Such severe regional price disparities are unlikely to re-emerge
soon because U.S. oil production has fallen to around 11 million
barrels a day, from some 13 million barrels a day earlier this
year, relieving pressure on the conduits that move crude around the
country, said Sandy Fielden, director of oil and products research
for Morningstar Inc. For those looking to unload weaker assets,
buyers are few and far between.
"They're in the same boat as the European refiners have been in
for years, which is too many refineries, not enough demand," Mr.
Fielden said.
Write to Rebecca Elliott at rebecca.elliott@wsj.com
(END) Dow Jones Newswires
August 03, 2020 08:02 ET (12:02 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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