PADD 1 oil demand in decline

U.S. oil refiners largely managed to survive the COVID-19 demand shock. Sometimes, as Dunkirk proved, survival is victory. With the worst of COVID seemingly behind the U.S. due to widespread uptake of safe and effective vaccines, economic demand and mobility are approximating pre-pandemic levels. While COVID variants continue to pose a risk to the U.S./world economic and public health recovery, we remain optimistic that vaccines will continue to enable a return to “normal” life – and better conditions for refineries. Even so, PADD 1 refineries in the U.S. east coast face serious problems that predate COVID.

The U.S. refinery complex has stabilized

The U.S. refinery complex is largely centered in the Gulf Coast (PADD 3) and the Midwest (PADD 2). In 2020, the two regions accounted for approximately 54% and 24%, respectively, of all U.S. refinery intake. As you can see from the chart below, refinery inputs have gradually increased over time and are slowly returning to pre-pandemic levels. Indeed, PADD 2 throughputs are exceeding same-period 2019 levels, as demand for crude products (such as gasoline, diesel, and jet fuel) is returning across the country.

Demand for crude products is generally rising across the board: the TSA reports that jet plane passenger throughput has exceeded 2019 same-period levels some days in July; weekly gasoline demand reached an all-time high in early July, according to the EIA; and YTD diesel demand is roughly flat from 2019 levels. The Delta COVID-19 variant circulating in the United States and abroad may dampen domestic and international sales, but we suspect that products demand will continue to improve as vaccinations reach more and more individuals.

An examination of refinery utilization rates confirms this story: for the first time since January 2020, U.S. refineries are operating above 90% utilization rates, with Midwest facilities running above 96%. There are two elements in the rebounding utilization story: growing demand – and closing capacity in the East Coast.

Trouble on the East Coast

The past decade has been rough for East Coast refineries, and their future isn’t bright. Today, there are just 7 operable refineries in PADD 1, according to the EIA, down from 14 in 2011. Throughputs are off considerably, as the region is struggling to refine even 0.7 million barrels per day (MMBPD), down from 1.1 MMBPD as late as May 2019. East Coast utilization rates reached a shocking 45% in April 2020. While the EIA estimates utilization rates have recently recovered to nearly 90% amid capacity closures (and we expect PADD 1 utilization rates will remain elevated for at least 2-3 years), there are some dark storm clouds on the horizon.

The northeast will likely substantially reduce its consumption of petroleum products in the coming decade. New York and New England are perhaps the two regions in the country most inhospitable for internal combustion engines. Public transit is a viable option for the vast majority of New York city residents, while New Jersey is the country’s densest state. Regional voters and policymakers are staunchly pro-renewables and opposed to hydrocarbons: New York City is instituting congestion pricing, while local and state governments are encouraging electric vehicle adoption. We believe PADD 1 EV adoption will dramatically accelerate, particularly in the latter half of the decade.

Still, the northeast’s pace of transition is a major wild card. COVID-19 has led to substantial increases in automobile purchases and driving, while consumers pared back transit ridership. According to the U.S. Department of Transportation, public transit riderships have fallen by more than half from pre-pandemic levels. We expect public transit ridership to continue to rebound as more individuals are vaccinated, but a return to pre-pandemic levels is not guaranteed. (By the by, if you’re interested in our outlook for PADD 1 EV uptake, public transit ridership, and their implications for petroleum products demand, drop us a line at info@enkonenergy.com).

Refineries have stabilized, PADD 1 in trouble over the medium-term

With the worst of COVID seemingly behind us, the refining complex’s near-term prospects are bright. U.S. consumers are returning to the pump, international demand for U.S. finished petroleum products appears to be gradually returning to pre-pandemic levels, and the shuttering of some excess domestic refining capacity is a boon to the refineries that survived the 18 months. In the near-term, U.S. refineries will likely continue to enjoy high utilization rates, although East Coast refineries will face growing structural pressure.