SINGAPORE/NEW DELHI/SEOUL/HOUSTON (Reuters) - Oil refiners from Texas to Thailand are bracing for deeper output cuts, bruised by an unprecedented demand shock as more countries lock down and restrict travel to contain the spread of the coronavirus.
Global fuel demand is set to drop by as much as 15% to 20% in the second quarter as a result of the coronavirus pandemic, which has killed more than 22,000 people, shut most worldwide air travel and has numerous countries imposing lockdowns keeping people at home and out of their cars.
The sudden stoppage in activity, along with Saudi Arabia and Russia’s decisions to increase crude supply, is expected to overwhelm refiners, who have fewer options to sell product and dwindling storage capacity.
In Asia, home to over a third of the global refining capacity, India’s top refiner has slashed output by up to 25%-30% while operators in Japan, South Korea and Thailand - already running at reduced rates - are looking at more cuts even as they shut plants for maintenance.
India’s Reliance Industries, operator of the world’s largest refining complex, has made a rare move to sell prompt crude as it plans to cut output in April.
Several U.S. refineries have also cut production, including plants in the Los Angeles area, a busy hub for air travel, and Exxon’s Baytown, Texas facility, its largest in the United States, which is shutting a gasoline-making unit.
U.S. fuel demand is sinking, with overall products supplied falling by 2.1 million bpd in the most recent week, a near 10% drop. Gasoline demand in the nation, the world’s biggest oil consumer, could drop by nearly half in coming weeks, IHS Markit said Thursday.
In Europe, some refineries in Britain and Germany have scaled back production, with traders expecting many others to follow suit as demand for products falters. ExxonMobil’s French subsidiary said on Friday it would adapt production at its two refineries in the country to falling demand.
Independent refiner Phillips 66 said its first-quarter refinery utilization rate was in the low-to-mid-80s range, with many of their refineries operating near minimum rates.
China, which restarted its economy after weeks of lockdown, is an outlier with its refining sector showing signs of recovery amid a decline in the number of new virus cases.
Global oil demand will likely slump 18.7 million barrels per day (bpd) in April, versus a 10.5 million bpd drop in March, Goldman Sachs analysts said. Total annual consumption will drop 4.25 million bpd from 2019 levels, they added.
“Such a collapse in demand will be an unprecedented shock for the global refining system,” the analysts said.
Asia accounts more than 60% of world oil demand growth.
The virus pandemic has roiled financial markets and oil has been hit particularly hard, crashing about 60% so far this year - on track for its biggest quarterly loss ever.
Refiners are now losing money as domestic demand has dried up with people staying at home, and bleak margins not making exports lucrative either.
A complex refinery in Singapore stands to lose nearly $2 for every barrel of crude it processes, including losses of more than $6 a barrel on gasoline production, Reuters calculations show.
To make matters worse, some refiners have been unable to use the downtime for maintenance purposes due to manpower shortages as a result of lockdowns and travel curbs.
“This first quarter would be the worst first quarter we have ever seen as producing oil products was loss-making,” said Cho Sang-bum, an official at the Korea Petroleum Association.
South Korea run rates fell to 82.8% in February, the lowest for the month since 2014, and more cuts will come as gasoline and diesel demand are expected to fall 30% in March, year-on-year, according to sources and data from the Korea National Oil Corp.
Japan is also considering more cuts after run rates fell nearly 7% for the first 12 weeks in 2020, data from the Petroleum Association of Japan showed.
The country’s top refiner, JXTG, expects a record net loss of 300 billion yen ($2.7 billion) for the year ending March, while Hyundai Oilbank is planning to cut expenses by 70% to help offset the impact of the slump in margins.
In India, refiners are facing a tough cash-flow situation, an official at one of the state refiners said. Their tanks are full, but their retail income has virtually halted due to weak demand while they continue to make payments for crude imports to avoid default, the official added.
U.S.-based Phillips 66 said it would cut expected capital expenditures by 18% in 2020, and that most units are running at their minimum capacity usage levels. Demand is also sliding in Latin America, which had been the primary destination for U.S. refined product exports.
China is an outlier, by contrast. The world’s No. 2 refining centre is expected to see its average run rate rise 3% year-on-year to 77% in the second quarter, from 63% in February, said Seng Yick Tee, analyst at Beijing-based consultancy SIA Energy.
Major refineries are optimising run rates for petrochemical feedstock, while low oil prices, stimulus measures and a rush to replenish stocks for manufactured parts as businesses come back online are spurring demand, the analyst added.
($1 = 110.0800 yen)
Reporting by Nidhi Verma in New Delhi, Jane Chung in Seoul, Yuka Obayashi in Tokyo, Chayut Setboonsarng in Bangkok, Enrico dela Cruz in Manila, Wilda Asmarini in Jakarta, Khanh Vu in Hanoi, Sonali Paul in Melbourne, Muyu Xu in Beijing, Shu Zhang, Jessica Jaganathan, Roslan Khasawneh, Chen Aizhu and Florence Tan in Singapore, Ahmad Ghaddar in London, Laura Sanicola in New York, Erwin Seba in Houston; Editing by Himani Sarkar, Pravin Char and Diane Craft