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Gulf Coast ULSD producers likely to remain cautious in 2021

US Gulf Coast refiners cut ULSD production in 2020 as the coronavirus pandemic lockdowns cut demand for transportation fuels virtually overnight, causing stocks to build as refiners were unable to slow down runs fast enough.

While a rosier demand picture is forecast for 2021, USGC refiners are likely to remain cautious and carefully monitor market conditions so as not to overwhelm green shoots of recovery emerging as the coronavirus vaccine is rolled out.

By year’s end, USGC refiners were running at 80.8% of capacity, up from October’s 72.7% utilization rate, according to Energy Information Administration data.

But USGC refinery rates are still not high enough to run the plants efficiently. The coronavirus pandemic has laid bare excess refining capacity, forcing refiners to shut or repurpose some plants.

And while the USGC’s sophisticated plants are less at risk than other regions, possibilities still exist for some refinery utilization. In a recent research note, Morgan Stanley estimated that 1.1 million b/d of US refinery capacity is getting mothballed or permanently shut, with an additional 350,000 b/d at risk for closure.

“[We are] still slightly bullish here, but don’t think we get a ton stronger without changes like more refineries shutting down, less imports into the East Coast, etc.,” one Gulf Coast trader said.
Rising demand

After touching bottom at 3.42 million b/d in June, US implied demand for ULSD began to rise, reaching 4 million b/d in October, EIA data showed.

USGC refiners cut ULSD production in October to 2.2 million b/d from September’s 2.4 million b/d to eat into unseasonably high inventories by reducing refinery run rates to 72.7% of capacity.

As a result, US ULSD inventories dropped to average 140.9 million barrels for the four weeks ended Dec. 25, EIA data showed, down from 166.3 million barrels in mid-August, thus giving USGC refiners the latitude to increase utilization to 80.8%.

Strong trucking demand from holiday shipping helped boost ULSD prices, with prices for waterborne USGC ULSD averaging $1.43/gal for the week ended Jan. 1, according to Platts assessments.

But diesel prices on the USGC are forecasted to fall from December’s $1.374/gal average to $1.322/gal in January and then rise throughout the year, according to forecasts from S&P Global Platts Analytics.

Platts Analytics forecast fourth quarter 2021 diesel prices to reach $1.5190/gal.
Offline refinery capacity

Including normal maintenance turnarounds, unplanned outages, refinery closures and refinery run cuts, Platts Analytics forecasts that about 2.08 million b/d of USGC refinery capacity will be offline in January.

This has helped refining margins increase but the question remains will demand return forcefully enough to boost refinery utilization to a more economic level. USGC coking margins for Mars averaged $4.13/b for the fourth quarter of 2020, up from the $2.42/b in the second quarter, but less than half of the $9.32/b seen in the fourth quarter of 2019, according to Platts Analytics.

“Margins are bad, but not as much as they were earlier in the year; that’s probably going to continue,” one Gulf Coast broker said.

“Things like low demand, stocks, etc. all come into play as well; I think some people will be a little slow to get back to pre-coronavirus levels.”
Source: Platts

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