The Phil Flynn Energy Report
It wasn’t too long ago when the U.S. lacked refining capacity. Politicians complained about high gas prices yet made it almost impossible to bring them down because it was practically impossible to build a new refinery because of burdensome regulations. In the U.S., refineries weren’t built for decades. Increased demand for fuels and strained refinery capacity caused high gas prices in the U.S. and tight supply as refiners struggled to keep up.
The refining world has changed. Now refiners are shutting down because the demand for fuel is weak and they can't make money. Due to top demand destruction from the Covid-19 spread and thin refining margins, the U.S. is going to see a reduction in capacity. This is a move that is being forced by the historic drop in global fuel demand but one that we will all pay for down the road. The first refinery to shut was the Holly Frontier refinery in Wyoming. Now a couple of Marathon Petroleum refineries are going to be closed as well.
Bloomberg News reports that, "Marathon Petroleum Corp, the largest U.S. independent oil refiner, said it wouldn't restart 2 refineries in California and New Mexico amid concerns that demand for fuels is unlikely to return to pre-pandemic levels this year. Marathon said in a statement it will convert its 166,000 barrel-a-day Martinez, California, refinery near San Francisco into a terminal facility and may add a renewable diesel plant to align with California's Low Carbon Fuel Standards objectives and Marathon's greenhouse gas-reduction targets. It will also close the 26,000 barrel-a-day Gallup refinery in New Mexico. Both refineries were idled in April as Covid-19 decimated demand for refined products like gasoline and jet fuel. Marathon said May 5 during its first-quarter earnings call that Martinez and Gallup were targeted because they are the highest-cost facilities among its 16 refineries. It assumed product demand would improve enough to restart them before the end of the year. Subsequently, gasoline demand briefly improved after a slew of states attempted to reopen their economies around Memorial Day, then stalled as Covid-19 raged anew.”
The problem is if and when California ever gets back to a sense of normalcy. Then the closure of these refineries will leave the state extremely vulnerable to gasoline and diesel price spikes. Before Covid, California’s refining capacity could barely keep up with demand. This will assure California that they’ll keep their place as one of the highest priced gas states in the union.
Marathon also sold its gas stations to 7-11. The Wall Street Journal wrote that, "Fuel maker Marathon Petroleum Corp. MPC 0.32% said it has agreed to sell its gas stations to the owners of the 7-Eleven convenience store chain for $21 billion in the largest U.S. energy-related deal of the year. The all-cash agreement with 7-Eleven Inc. comes less than a year after Marathon agreed to spin off its convenience-store chain, known as Speedway, under pressure from activist investors, including Elliott Management Corp.
The Speedway deal includes about 3,900 convenience stores and would bring 7-Eleven's retail footprint in the U.S. and Canada to around 14,000 locations. Under the agreement, they are expected to close early next year. Marathon would supply 7-Eleven with about 7.7 billion gallons of fuel per year for 15 years.
Of course, oil today is off to a weak start as we see more cases of Covid-19 and talk of more oil from OPEC. Still, we expect a significant drop in U.S. oil inventory this week. The OPEC+ cuts and plunging U.S. oil production are starting to be felt. The EIA reported on Friday that U.S. crude oil production fell to 10 million barrels a day (bpd). That’s way off the weekly estimates that the EIA puts out. If the weekly numbers from the EIA are that far off than why bother reporting them? Estimates indicated at the time that production was at almost 12.0 million bpd in Apr and 12.7 million bpd in March.
The oil demand trajectory is cloudy even as economic stimulus continues to juice the economy. Strong economic data out of Europe and China overnight seems to suggest that there is some working around the pandemic. Marketwatch reported that the Caixin China manufacturing PMI rose to 52.8 in July, with the best readings for output and new orders since January 2011. Spain’s manufacturing PMI rose to 53.5, its best showing since April 2018, as the final manufacturing PMI reading for the eurozone came in stronger than the flash report.
This would suggest that oil demand globally is still on a path to recovery. In the U.S. crude supply should fall by at least 4 million barrels this week. Gasoline supply should also be down by 2 million and diesel down by 1.0 million barrels. That may give us a bounce.
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