Market Analysis

From Stillwater Associates

November Market Analysis

Published November 16, 2020

Introducing the West Coast Watch Market Analysis


The West Coast transportation fuels market is rapidly changing with significant impacts just this year due to the COVID-19 pandemic and the push to de-carbonize the transport sector. Based on these factors and with an eye toward helping stakeholders navigate this challenging market, Stillwater is introducing our West Coast Watch market information portal. Fuel producers, marketers, retailers, and investors need a clear view of refining profitability, and petroleum and renewable fuel supply and demand trends in one place. Stillwater’s West Coast Watch provides the data, news, and analysis stakeholders require to make profitable decisions. Stillwater Associates has provided transportation fuels consulting services for over 20 years and the WCW is an extension of our expertise around mid-and downstream fuels market issues. It provides an outlet for our extensive data and expert analysis. Our monthly West Coast Watch Market Analysis offers the latest refining, petroleum product, and renewable fuels trends. This analysis delivers Stillwater’s exclusive take on market developments and offers valuable forward-looking insights on what these developments may mean for stakeholders. This month we review the impact of COVID-19 and the subsequent stay-at-home orders on West Coast refiners.

In addition to the exceptional challenges facing West Coast refiners in 2020, refiners in California and Washington face unique market pressures even in the best of times. Geographic isolation, unique gasoline and diesel specifications, and greenhouse gas (GHG) reduction regulations including the federal Renewable Fuel Standard (RFS), California’s Low Carbon Fuel Standard (LCFS) and Cap and Trade (C&T) programs and Oregon’s Clean Fuels Program (CFP) make it costly to source finished petroleum products from outside the region, ensuring that in-region refiners are the primary source of finished petroleum products for the West Coast. Based on these factors and with an eye toward helping stakeholders navigate this challenging market, Stillwater has developed a proprietary index to assess West Coast margins at the refinery gate. The West Coast Watch Refining Margin Index is designed around the market enclaves (Southern California, Northern California, and the Pacific Northwest), the typical crude run in West Coast refineries, the cost of compliance with GHG-reduction regulations, and the local refined product prices. This tool provides trends for the refining margin along the West Coast, and we hope our readers will find it instructive.

2020 Refining Margin Index by Enclave

Source: Stillwater Analysis

West Coast Refining Margins are Ugly

The COVID-19 pandemic has caused extraordinary loss in West Coast refining margins. In general, margins for the three enclaves follow similar patterns. The refining industry is seasonal and, in general, experiences margins dropping in the winter, building through the spring, falling off again in the late summer, and building up in the fall. This year, the indices peaked in Southern California on February 13th at $22.95 per barrel (bbl). The Northern California index peaked later in the month on February 28th at about $18.00/bbl. The PNW index peaked on March 2nd at $22.60/bbl. The beginning of the COVID-19 pandemic can be clearly seen after that peak as California announced its stay at home order on March 20th and Oregon and Washington followed suit on March 23rd. The refining index cratered on March 24th, saw a slight recovery, and then cratered again the week of April 3rd-9th. Marathon announced they would temporarily idle the Martinez refinery on April 27th. On that day, Northern California margins had improved to $16.70/bbl. At the end of July, when Marathon announced the permanent closure of the Martinez refinery, the Northern California index had decreased to $11.80/bbl. The margin indices for all three enclaves remained low but stable through the end of summer and into fall, seeing a dip in mid-October. On October 13th, the Southern California margin index was $8.76/bbl, Northern California was at $8.43/bbl, and the Pacific Northwest was at $7.63/bbl. All three margin indices have improved this month, with the Northern California margin index seeing the most improvement at $16.48/bbl on November 9th. The Southern California margin index improved to $13.66/bbl, and the Pacific Northwest index increased to $13.49/bbl on that day.

 Looking at the bigger picture and adding some historical context, we can see just how ugly the pandemic has been for West Coast refiners. The Historic and Recent Refining Margin Index shows the five-year average index range for all three enclaves along with the trends for 2019 and 2020. The first quarter of 2020 was clearly an improvement on 2019. However, at the bottom of the dip (around April 6th) the average index was -$3.10/bbl, a 112% loss from the $25.90/bbl index on the same day in 2019. The summer saw some improvement as the 2020 indices edged closer to the bottom of the five-year range in August. The end of October and beginning of November have seen indices hit the five-year range, averaging $14.83/bbl in the first week of November. This is 6.4% lower than the average for the same week in 2019 at $22.92/bbl.

Historic and Recent Refining Margin Index

Source: Stillwater Analysis

Demand Destruction is Driving Down Production

The steep decline in demand caused by the pandemic is driving refining margin collapse and shaking up the refining environment in California. Refiners are adjusting to the new demand environment by reducing production of the two products that have seen the most severe impact from the pandemic: gasoline and jet fuel. 

In our analysis, Stillwater uses EIA’s demand, inventory, and production data for PADD 5. The PADD 5 region includes Alaska, California, Hawaii, Nevada, Oregon, and Washington. The largest refining centers in PADD 5 are in Southern California, Northern California, and Washington, but there are smaller refineries in Alaska and Hawaii. 

The closing of West Coast economies resulted in a sudden, unprecedented drop in demand for jet fuel and gasoline at the end of March.

Estimated Weekly PADD 5 Gasoline Demand (kbd)

Source: EIA

Gasoline demand dropped by about 45% in just four weeks, from 1,600 kbd in mid-March to 838 kbd in mid-April. Demand has improved through the summer and fall but is still about 10% below 2019 levels.

Estimated Weekly PADD 5 Jet Fuel Demand (kbd)

Source: EIA

Jet fuel demand experienced an even steeper decline of about 70% from 616 kbd in mid-March to under 117 kbd in the beginning of May. It has struggled to improve during the pandemic, averaging around 50% below 2019 levels.

Estimated Weekly PADD 5 Diesel Demand (kbd)

Source: EIA

Diesel demand also declined abruptly at the start of the stay-at-home orders. However, because freight continued to roll during the pandemic demand recovered quickly. Diesel demand remained close to its historical range and recovered to levels in the normal range by October. Demand has continued to increase hitting 588 kbd on November 6th, exceeding demand during the same period in 2019.

Petroleum Inventory Analysis

This enormous contraction in transport fuel demand caused convulsions in the West Coast fuel value chain. Crude runs decreased, lowering production, but not as fast as demand, sending inventories of jet and diesel to the top of the historical range.

PADD 5 Jet Fuel Inventory (million barrels)

Source: EIA

Jet fuel inventory peaked on April 25th at 10.4 million barrels. Inventories fell steadily through the spring and summer, normalizing to historical levels by August 15th.

PADD 5 Diesel Inventory (million barrels)

Source: EIA

Diesel inventories peaked on June 12th at 12.5 million barrels, staying well above average for four weeks. Inventories fell to normal, historical levels by July 17th.

PADD 5 Gasoline Inventory (million barrels)

Source: EIA

Meanwhile gasoline inventories grew to record-high levels in early April, reaching 35 million barrels and staying above average for four weeks. Inventories fell to normal, historical levels by May 23rd.

Petroleum Supply Analysis

Estimated Weekly PADD 5 Gasoline Production (kbd)

Source: EIA

The steep decline in demand and limited storage capacity forced PADD 5 refiners to cut crude runs, while some refiners shut down. Jet fuel was blended into diesel which was loaded into export ships in order to avoid causing storage tanks to overflow. PADD 5 gasoline production dropped in this period, reaching a record low of 718 kbd on April 25th, 66% lower than production volumes on the same day in 2019 at 1,088 kbd. Production has slowly increased reaching about 90% of 2019 production volumes by the end of September. October production volumes dropped to 1,003 kbd on Halloween, well below the five-year average and only 80% of volumes on the same day in 2019, at 1,245 kbd.

Estimated Weekly PADD Jet Fuel Production (kbd)

Source: EIA

Jet fuel has seen the steepest and most prolonged drop in demand causing PADD 5 refiners to dramatically reduce production. Production began ramping down in mid-March and bottomed out on May 16th at 129 kbd, just 33% of production on the same day in 2019 at 387 kbd. Jet fuel production improved slightly through the summer and fall, reaching 239 kbd on October 31st, or 54% of production on the same day in 2019. Stillwater expects jet fuel demand will struggle to recover in 2021, only returning to about 65% of the EIA’s 2020 Annual Energy Outlook forecast.

Estimated Weekly PADD Diesel Production (kbd)

Source: EIA

Diesel production dropped through the summer but climbed back up to within the five-year range by early September. Production volumes exceeded 2019 production on October 9th at 525 kbd. Production has remained within normal levels through the month ending October at 521 kbd, very near the same production volume on the same day in 2019 at 529 kbd.

Product imports and exports also oscillated in 2020. Gasoline exports increased to more than 100 kbd in April, but softened to 20 kbd in June, July and August. Diesel exports were steady above 100 kbd through April, and then dropped to less than 20 kbd in May and June. Jet fuel imports declined from 95 kbd in March to 51 kbd in May, only to recover to above 100 kbd in July.

Overall, production, demand, and inventories have reached a new steady-state that has enabled the Stillwater Refinery Margin Index to stabilize at an average of about $11 per barrel. How these margins change over the next few quarters and years will depend on the continuation of demand recovery and actions taken in the refining sector to balance supply with that demand.

Market Trend Highlight: The Impact of COVID-19 on West Coast Refiners

On January 9th, 2020, the World Health Organization (WHO) announced a mysterious Coronavirus-related pneumonia in Wuhan, China. In the weeks that followed, as the medical community observed alarming transmission rates of the disease now dubbed “COVID-19,” Wuhan province came under strict quarantine orders. By January 21st the Center for Disease Control (CDC) reported the first case of the Coronavirus in the U.S., and on January 31st, the WHO declared a global health emergency. Travel bans from several Asian countries were announced in February as cases rapidly grew and the disease began to be characterized as a pandemic. By the beginning of March, COVID-19 cases had spread substantially in Europe, and travel bans were expanded. Cruise ships around the world became hotspots for the Coronavirus. As the global death toll began to take off, fear of travel and public spaces took hold. As preventative measures, workplaces in the U.S. West Coast began to allow and even encourage a temporary work-from-home scenario and some schools moved to distance learning. Finally, on March 19th, Governor Newsom issued the country’s first statewide stay-at-home order, mandating that Californians only leave their homes for essential work or needs, and the rest of the West Coast followed with shelter-in-place orders shortly after.

The COVID-19 pandemic has had a dramatic effect on all phases of the global economy. Here we provide a deeper dive on how it has impacted the prospects of West Coast refiners.

Stillwater’s West Coast Watch Refining Margin Index is the proprietary tool we developed to assess West Coast margins at the refinery gate. Figure 1 shows the index as monthly averages, beginning in 2018. Typically, there are periods during a year of high refiner margins on the West Coast as demand variations and supply disruptions occur. Since the pandemic began in March 2020, there have been no periods of high margins as West Coast refineries have been operating at well below capacity.

Figure 1. Stillwater Refining Margin Index as Monthly Averages

Source: Stillwater Analysis

The index is highlighted in orange for March 2020 and beyond, as COVID-19 restrictions began in earnest the third week of March. From that point on, margins were very depressed through April 16th. The index for the one-month period starting March 16th averaged $2.11/bbl, which is well below any month illustrated in the figure, and historic levels since 2015. Since mid-April we have seen the index flatten with a late upward trend in early November.

Table 1: Selected Metrics from Refiners Reporting West Coast Data

Source: Public Refiner Revenue Data, Stillwater Analysis
WCW Selected Metrics from Refiners Reporting West Coast Data

Refiner Earnings

In Table 1, the earnings of refiners operating on the West Coast are displayed. (Refiners who do not report regional or individual refinery financials are not included in this analysis). Unlike financial data with its strict reporting standards, operational data in refining does not have specific standards. Although refiners label these metrics identically, each refiner uses their unique methodology to calculate a version of them. In addition, marketing performance is often merged with refining performance. Thus, comparing the same metric across refiners may not be a direct comparison; however, the trend of a refiner would be valid.

Figure 2: Gross Margin Trends and Comparison to the West Coast Refining Margin Index

Source: Stillwater Analysis

Refiner Gross Margin

One prime measure of refinery performance is gross margin: usually revenue less feedstock and operating costs. As discussed above, there is not a standard of which operating costs (if any) are included in a refiner’s gross margin calculation. In the refining margin index, we do not estimate operating cost at this time, although Stillwater may develop a Net Index in the future.

Figure 2 shows the reported quarterly gross margins by company against the backdrop of the quarterly averages of Stillwater’s Index. 

The figure illustrates a definite decline in gross margin in 2020 for the group of West Coast refiners identified earlier in the report. Gross margins reported by this group of refiners in the second and third quarters of 2020 are far below 2019 and historic gross margin levels because of COVID-19. We also see that refiners’ gross margins (from earnings releases) closely follow the index.

Refiner Reactions to Demand Changes

As a result of the steep demand destruction and continued fallout in 2020, several West Coast refiners have been forced to adjust production in order to balance inventories. In March, Marathon, Phillips 66 and Chevron refineries in the Los Angeles area announced production cuts of 20% or more. Shortly after, Par Pacific in Hawaii shut down its 54 kbd facility known as Par West and announced the postponement of planned turnarounds at both East and West facilities. Par Hawaii was particularly hurt by the steep decline to its jet fuel exports. The facility has remained closed since, but the Par East facility, with 94 kbd capacity, remains open. In April, Shell’s Anacortes, Washington refinery announced it had cut runs and was operating at 60% capacity; BP’s Cherry Point, Washington facility also made estimated run cuts of 20%.

Refiners have continued to struggle amidst depressed demand for fuel, but interest in sustainable aviation fuel (SAF) by major airlines has remained steady, and demand for renewable diesel (RD) has surged. Coupled with valuable incentives, such as LCFS, RIN, and Blenders Tax credits, these market levers have spurred a major shift in refining. With some West Coast refineries operating at minimum capacity, a move to repurpose existing assets began to take shape. In April, Marathon announced that it would idle its 166 kbd Martinez refinery, and, in August, announced plans to convert the refinery site to a renewable diesel plant. In the same month, Phillips 66 announced that it would idle crude processing at its 120 kbd Rodeo, California refinery and shift to producing RD, naphtha and SAF, eventually making it the largest biofuels plant in the U.S. (Midwestern refiners CVR and HollyFrontier made similar announcements).

A Look In the Crystal Ball?

Following recent encouraging announcements about the development of a COVID-19 vaccine, there is hope that business could return to close-to-normal levels. However, the production and logistical challenges of global vaccinations suggest that this process will take more than a year to play out. This means that it will take years, instead of months, for economies to fully open to vacation travel and, hence, a similar time frame for gasoline and jet fuel demand to recover. In addition, it is likely that the “new normal” will not be the same as before the pandemic. Many jobs have been modified to allow employees to work from home, and colleges and universities may retain some version of remote learning indefinitely. Stillwater estimates that if half of office jobs continue to be performed remotely, there will be a permanent reduction in gasoline demand of about 5% from reduced commuting. And, even as the effects of the pandemic recede into history, ongoing changes to the transportation fuels industry from efforts to abate climate change are accelerating. These forces are changing the make-up of the vehicle fleet and beginning to impact air and ocean transport as well, and the effects will continue to shift the mix of transportation fuels.

Transportation Fuels Expertise

Stillwater sees things others miss. We are experts in the West Coast transportation fuels market. Our Associates leverage decades of experience in the transportation fuels industry to provide the insights offered in this analysis. We are also available to provide more in-depth and personalized analysis and outlooks for our consulting clients.

If you find yourself wanting a deeper dive on the subjects we’ve covered in this newsletter, contact us to learn how we can help.

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