Oil’s Three-speed recovery has turned the industry upside down

The global network of tankers, pipelines and refineries that makes useful fuels out of crude oil is built on long-standing patterns of consumption: so much gasoline for the world’s drivers, a certain amount of diesel for trucks and a proportion of jet fuel for aviation.The pandemic economy has turned that upside down, radically reshaping demand as different parts of the energy system recover at different speeds. Fear of the virus has persuaded millions of drivers to forgo mass transit and get in their cars. Meanwhile, international travel is a vestige of a year ago and thousands of airliners lie mothballed.

Although crude prices remain in the doldrums, stuck near $40 a barrel for the past four months, a three-speed demand recovery is starting to show in obscure corners of the oil market. India, ravaged by the Asia’s worst Covid-19 outbreak, has started to import gasoline. In Europe, drivers are using almost as much fuel as before the pandemic even though overall economic activity remains depressed. In Asia, where the divergence has been strongest, gasoline inventories have plunged in recent weeks.By contrast, the market for jet fuel, about 8% of the global market pre-pandemic, remains dire, with idle tankers floating fully laden holding unwanted cargoes. Surplus fuel is being blended into diesel, causing knock-on oversupply.

Fully Back

Caught in the middle are oil refineries, the huge tangles of boilers and pipes where billions of tons of crude get cooked into different products each year. In most parts of the world, they’re running well below capacity because consumers aren’t paying enough for jet or diesel. That’s constraining their ability to make sufficient gasoline.In Europe, fuel demand from drivers is “now almost at the level where it was a year ago,” said Patrick Pouyanne, chief executive officer of Total SA, Europe’s biggest refining company. “We still face low oil prices and refining margins are absolutely terrible.”Refiners have some scope to tweak how much crude they turn into each of the main refined petroleum products.

But that’s not solving the problem. As jet-fuel demand crashed, refining engineers responded by diverting as much jet as possible into the production of diesel. The thought was that demand for diesel, used in freight, construction and public transport, was more resilient than gasoline.

Public Transport

Instead, as people shunned trains and buses in favour of their own cars, diesel demand has recovered more slowly than gasoline. With diesel output booming due to the injection of jet-fuel, the result has been an enormous glut.

“A uniform recovery in oil products markets will be elusive until a vaccine is widely distributed,” said Amrita Sen, co-founder of consultant Energy Aspects Ltd. “Jet fuel demand is comatose.”India, the world’s No. 3 oil consumer, is emblematic of the troubles for global refining. In September, Indian gasoline demand posted an annual increase, up 2.1% over the same month of last year as city dwellers used their own cars to go to work. At the same time, diesel demand was down 7.3% and jet-fuel demand fell more than 52%.

That left the country’s refiners facing the daunting task of meeting conflicting consumption trends. One state refiner responded by importing gasoline because it wouldn’t be profitable to run its diesel-oriented units at this time.

Different Patterns

The patterns have been slightly different in the world’s largest oil markets: the U.S. and China.Because Americans are far less likely to rely on public transportation than other parts of the world, Covid-19 has meant less driving as businesses shed jobs or shifted into remote working. Many of the nation’s students are also not attending schools, further stifling consumption.Americans drove 14.9 billion interstate miles in the last week of September, about a billion fewer than the same time a year ago, according to the Department of Transportation.But reduced refinery operations since the onset have helped keep stockpiles of gasoline only slightly higher than normal for this time of year.The nation’s refiners are drowning in a glut of diesel though—not so much because demand is lacking, trucking has boomed as the economy moves online—but because jet fuel is swelling the whole pot of so-called middle distillates. Demand for the fuel stuck is at about 50% of the five-year average for this time of year.Stockpiles are close to the highest they’ve been this time of year in EIA data going back 29 years.

The distillate glut has crushed margins and forced major refineries to shut units that make the fuel. The so-called crack spread, which measures the difference between a barrel of diesel over one of West Texas Intermediate has been under severe pressure. The spread was trading around $8.50 a barrel Friday, downover $25 a barrel a year ago.In China, the major economy that’s recovered fastest from the pandemic, fuel demand was first to rebound post-Covid-19. Gasoline consumption is running ahead of pre-virus levels as commuters shun subway networks.And while domestic flying has recovered markedly, international travel is still a trickle. Diesel is stuck in the middle, prompting some unusual prices in Singapore, Asia’s oil-trading hub.Benchmark gasoline there was at a $3.26 per barrel premium to diesel on Sept. 28, the most since at least 2017, Bloomberg data show. Back in March, the motor fuel stood at a discount of $25. The premium was 20 cents on Wednesday.Oversupply of jet fuel—normally among the most expensive oil products—has pushed prices so low that it is even being blended with the much cheaper shipping fuel.

All Cargoes Europe

Europe’s refineries are grappling with the same dynamic, forcing the diesel crack spread to crude to plunge to as little as $2 a barrel in recent weeks.

On paper, the region should have one advantage. It has long made excess gasoline, and insufficient diesel.

Europeans consumed more than double the amount of diesel last year than they did gasoline, according to data from BP Plc. Because the region’s refineries make more of gasoline than gets consumed, surplus supplies get shipped on tankers to New York and other cities on the U.S. East Coast.

By contrast, the continent doesn’t churn out enough diesel and so is normally a magnet for suppliers from all over the world. Europe imports oil products—usually diesel and jet fuel—from regions including Asia, the Middle East, Russia and the U.S. Flows have slowed since the height of the summer, but they certainly haven’t stopped. By late September, more than 20 fuel-carrying tankers had arrived from the Persian Gulf alone. More are en route, including from India and East Asia.

Demand for diesel also remains relatively weak compared with gasoline, according to two European traders of petroleum products.

About 3% of crude processed in a refinery can be switched from production of kerosene—which is more or less identical with the aviation fuel—toward making diesel, according to Oil Analytics Ltd., a firm that tracks refining margins globally. That’s about double what can be pushed into making gasoline.

To some extent refineries have been able to cope with the three-speed recovery because they cut how much oil they process—giving them greater flexibility in what they churn out.

“The changes in product demand have been such that all the additional flexibility offered by the lower run rates has been exploited to the max,” said Jan-Jaap Verschoor, an analyst at Oil Analytics. “There’s only a little bit of flexibility left in the system.”