Meeting rising gasoline demand heading into the summer months is the best bet for U.S. refineries to stop the losses they had incurred last year and in the first quarter this year.
U.S. refiners had to not only suffer through the collapse in fuel demand when the pandemic started hitting mobility in March 2020, but many along the Gulf Coast had to shut operations for weeks during the Texas Freeze and pay higher electricity and natural gas costs.
Some of the largest U.S. refiners said earlier this month that the losses from 2020 continued through the first quarter, also due to demand and supply outages during the winter storms in February and increased costs for power.
Refiners, however, started to express optimism about the 2021 fuel demand recovery as early as in January when they reported the 2020 earnings. Vaccine rollouts and economic growth are expected to drive increased traveling by road, including from pent-up demand after restrictions were eased.
Current estimates about gasoline demand—the largest portion of oil consumption in the United States—point to gas usage recovering to near pre-pandemic levels, thanks to the upcoming start of the summer driving season and expectations of increased employment rates and consumers spending more on goods and services outside their homes.
In the week to April 2, U.S. refinery utilization rose to its highest level so far this year, 84 percent, EIA data showed. A year ago the same week, refinery utilization was just 75.6 percent, while the utilization in the same week in the last 'normal' year, 2019, was 87.5 percent. Related: Investors Rush To Oil Stocks Despite ESG Push
In the Midwest, refinery utilization even exceeded the 2019 level as it hit 88.7 percent in the week to April 2, 2021, higher than the same week of 2019, when it was 86.5 percent.
These are encouraging signs for the U.S. refining industry for the rest of 2021, after a difficult start to the year in Q1 with the Texas Freeze distorting operations and leading to higher costs for refiners.
Valero Energy said last week it would report a net loss of between $735 million and $835 million for Q1. Valero estimates that excess energy costs impacted its refining operating income by as much as $485 million in the U.S. Gulf Coast region and by up to $45 million in the Midwest.
Phillips 66 also guided for a Q1 net loss of between $680 million and $865 million, citing higher utility costs "driven by significant increases in prices for natural gas and electricity in certain markets due to the increased demand and supply outages caused by the winter storms."
The winter storms resulted in lower utilization of assets, as well as higher utility, maintenance, and repair costs, Phillips 66 said.
Marathon Petroleum is also expected to book a Q1 loss, as per the average of analyst estimates compiled by Bloomberg.
Despite the losses for the first quarter, the rest of the year looks brighter for U.S. refiners amid expectations of higher fuel demand.
AAA, for example, expects gasoline demand in April to remain below levels from 2019, but sees healthy increases from a year ago, when many Americans were quarantining.
"More vaccinations combined with the U.S. fiscal stimulus should support continuing economic recovery, which will drive petroleum demand growth," the EIA said in its Summer Fuels Outlook last week.
This year's summertime gasoline consumption will average almost 8.8 million bpd, up by 1.0 million bpd, or 13 percent, compared to 2020. Demand, however, will still be 700,000 bpd, or 7 percent, down compared to the pre-pandemic summer of 2019.
"Second quarter, you'll start to see things pick up and then we expect things to be fairly normal by the third quarter, with the exception that we do see that there could be a lot of pent-up demand and people that are spending disposable income largely buying things that they're ordering are going to spend that disposable income getting out and on experiences, family vacations, which could cause a surge in gasoline demand," Gary Simmons, Executive Vice President and Chief Commercial Officer at Valero Energy, said on the Q4 earnings call at the end of January.
On April 22, Valero will report Q1 figures and update the market on expectations about demand for the rest of the year. Although it flagged another quarterly loss, the refiner could see brighter days ahead, thanks to rising U.S. gasoline demand.
Vaccine rollouts and higher economic and consumer activity could help U.S. refiners to see the light at the end of the tunnel later this year.
By Tsvetana Paraskova for Oilprice.com
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