The plunge in gasoline and jet fuel demand in the wake of Covid-19 lockdowns has set refiners on probably their worst year in a decade. That’s proved to be the trigger for a rash of refinery closures and a pivot to renewable fuels. Meanwhile, road transport fuel is on the mend, with U.S. gasoline consumption nearing pre-COVID-19 levels and diesel consumption on track to possible break records this year.
Related ETF: VanEck Vectors Oil Refiners ETF (CRAK)
US refiners entered the year configured to meet a booming market. Instead, they have had to contend with an unprecedented pandemic-driven collapse in demand for their products. This year’s average global refinery utilization rates are expected to be the lowest in 37 years, according to the International Energy Agency.
As expected, brutal market conditions have torpedoed their earnings in 2020, forcing refiners to re-evaluate their businesses and make some changes. Some are choosing to permanently shut down facilities that have been idled since lockdowns were imposed. Others are seizing this opportunity to pivot into the production of renewable fuels.
Plant Closures Remove Excess Capacity
Oil refiners are permanently closing processing plants in Asia and North America. Around 4 million barrels per day (b/d) of shutdowns will be necessary over the next few years to underpin a meaningful refinery margin recovery, according to an analyst at JBC Energy.
Of the 800,000 barrels b/d of North American refining capacity idled this year, at least 575,000 b/d of that capacity will never come back online, according to Argus Media. Another 500,000 b/d of capacity is up for sale. The 575,000 b/d of capacity earmarked for closure this year had imported 300,000 b/d of crude since 2015, mostly from west Africa, Canada and Latin America.
Meanwhile, Royal Dutch Shell is shutting down one of only two oil refineries operating in the Philippines. Plants in Japan, Australia and New Zealand are said to be likely candidates for closures as well…