Collapsing Demand Leads to Refinery Closures
There are around 3 billion people on some form of a lockdown around the world. In those circumstances, refiners have seen buyers vanish overnight.
"We're seeing even our Latin American customers asking us if they can back out of cargoes now, so we see that the demand destruction is starting to move toward Latin America," Brian Mandell, the Phillips 66 executive, told investors.
With no buyers, gasoline is set to pile up in storage. Refiners are looking at no other choice but to curtail or shut down operations.
Valero Energy, for instance, recently announced that it would limit output at six of its 12 U.S. refineries. ExxonMobil announced significant cuts to its refineries in Texas and Louisiana, citing the lack of sufficient storage capacity. Notably, Exxon said it would shut down its gasoline unit at its Baytown, Texas, complex, the company's largest such unit in the United States.
"The refiners are struggling mightily, due to the steep drop in demand," John Kilduff, a partner at Again Capital LLC, told Bloomberg. "The poor refining margins will push companies to reduce operating rates further."
The danger for some refineries is that they cannot simply throttle back and operate at really low levels. "In our experience, crude throughput in the 60 percent to 70 percent range is approaching the minimum rates that a refinery can operate without completely shutting down units," RBN said.
According to Phillips 66, even that threshold might be optimistic. "I don't think a good rule of thumb would be down in the 60 percent range for refiners. Most refineries can't turn down that far," Robert Herman, an executive with Phillips 66, said on an investor call. With refiners already lowering processing, "we're nearing kind of minimum crude rates in many of our refineries today," he added.
In other words, facing a mounting glut and no ability to lower output further, some refineries may simply need to shut down entirely.