Gasoline, the refiner’s favorite child, is the key fuel behind the global oil demand doom

As the global population puts the breaks on ground transportation thanks to lockdowns, road fuels – which make up about half of the world’s oil demand – has become the segment most impacted by the Covid-19 pandemic. Among road fuels, gasoline is hardest hit. As it is the most-refined fuel, its decrease will in itself cut global oil demand by 3.63 million barrels per day (bpd) or 3.6% in 2020, according to Rystad Energy estimates.

Before the Covid-19 pandemic, global oil demand was forecast to rise to 100.5 million bpd in 2020, from 99.5 million bpd in 2019. Now Rystad Energy expects it will instead dive to 89.23 million bpd.

Gasoline accounts for 32% of the total 11.27 million bpd demand loss. Diesel accounts for 2.03 million bpd, or 18%of the demand decrease, while jet fuel accounts for 2.36 million bpd or 21%, and other fuels for 3.25 million bpd or a combined 29% fall.

“As global travel restrictions will largely stay in place in May 2020, gasoline demand will remain significantly depressed. Everyone along the supply chain is getting hammered right now, but refiners and traders exposed to gasoline are suffering the most,” says Rystad Energy Senior Oil Market Analyst Artyom Tchen.

We already see that the profitability of processing gasoline has gone through the floor; in the US refineries lost around $3 for each barrel of gasoline processed through most of March and April. In other parts of the world, refineries see end-user markets for their production disappearing as product demand falters. Refineries are responding to this shock by cutting processing rates.

Global road traffic liquids consumption is dominated by gasoline. This is the case for all regions except Europe, where the dieselization of the passenger vehicle fleet contributes to a higher diesel share in consumption. In the United States, gasoline makes up almost 75% of all road fuel consumption. This share climbs to over 90% if only considering passenger vehicles, the segment most severely hit by the current market turmoil.

On average, we expect North America to lose around 2.2 million bpd of gasoline demand over the second quarter of 2020. As we speak, gasoline demand in the United States is likely down as much as 3 million bpd or close to 30% of normal consumption levels. This is largely because refineries in the United States are traditionally built to yield more gasoline; on average, close to half of every processed barrel of crude (46% to be exact) coming from a crude distillation unit in the US (CDU) is gasoline.

“As the end-market for gasoline has only shrunk, refineries face the imminent issue of gasoline storage overflow. If refineries were to continue activity at March 2020 levels, this would result in gasoline storage reaching full capacity as soon as mid-May. Instead, refiners are already scaling back operations in an attempt to avoid hitting the gasoline storage wall,” adds Tchen.

As negative gasoline demand is still expected to plague the US throughout May, and a very weak driving season is expected during the summer, it is unlikely that demand for crude will return in the first half of the year. To balance the crude market and avoid further deterioration of the fundamentals, we expect to begin seeing oil production cuts immediately – not from the beginning of May, as announced by OPEC+.

This is especially the case for the United States, where substantial market-driven or voluntarily production cuts should occur. We can say with a great degree of certainty that neither end-user product demand nor refinery demand will do the US any favors in the immediate future and that balancing from the supply side is needed.