The Oil Spill: U.S. Refineries Pullback Production as Acquisition Cost Surmounts and Demand Tumbles

  • Feb 26, 2020 AEDT
  • Team Kalkine
The Oil Spill: U.S. Refineries Pullback Production as Acquisition Cost Surmounts and Demand Tumbles

Crude oil market is whiplashed from two major market disturbances, namely, IMO 2020 and Coronavirus. Both the events have disturbed the previous demand and supply scenario, which was dominated by the supply side.

The introduction of IMO Marpol Convention, which aims to curb the usage of high-sulphur bunker fuel by the maritime transportation industry, has shifted the demand to low-sulphur content fuel, which is less scalable at the present situation. The limited scalability of the low-sulphur fuel is prompting the maritime industry to either install scrappers or shift to LNG.

The high preference of maritime industry of installing scrappers, which allows them to use the bunker fuel (high-sulphur), is further increasing the freight cost across the oil industry, disturbing the cost amidst of weaker demand due to the impact of the coronavirus outbreak.

As per the latest situation report (25 February 2020) from the World Health Organization (or WHO), four new Member States, i.e., Afghanistan, Bahrain, Iraq, and Oman have reported the cases of COVID-19. Now, globally there are 80,239 confirmed cases (908 new), and in China alone, there are now 77,780 confirmed cases (518 new), which further resulted into 2,666 deaths (71 new).

The WHO has assessed a very high risk of coronavirus not only in China but also a high risk at the global level.

Source: WHO

The emergence of the coronavirus and it spreading like wildfire has taken down many economic activities across the globe, which is reducing the demand for oil, a factor assessed by the United States Energy Information Administration (or EIA) to largely dictate the oil price previously.

Also Read: Demand for Crude Oil & Distillate Products Down: Is China to blame?

Post the Aramco incident, the U.S. EIA suggested that the supply impact would be minimal ahead in deriving the oil price, amid large production from the United States and other non-OPEC countries, and the oil market would respond largely to the demand.

To Know More, Do Read: EIA Forecasts on the Brent Crude Oil; Crude Oil Prices Likely to be Demand-driven Ahead?

The outbreak of the coronavirus in China, which in just a matter of time became a global concern, had exerted tremendous pressure on the oil demand, and prices have reacted to the same with Brent oil futures (LCO) falling from USD 71.75 a barrel (intraday high on 8 January 2020) to the recent low of USD 53. 96 (intraday low on 25 February 2020), which marked a fall of ~ 24.80 per cent.

As per the estimation of China National Petroleum Corp (or CNPC), the demand for refined products in China is anticipated to decline by 35.7 per cent against the previous corresponding period during the current quarter. The fall in demand for refined oil product is further estimated by CNPC to lead a surplus of 27.08 million tonnes at the local market.

The fall in demand for oil is further complemented by the rising production across the United States in putting pressure across the global oil market.

  • United States Oil Trades

The domestic production across the United States reached record volumes 13.0 million barrels per day in January 2020 (for the week ended 8 January), and since then, the United States is upholding the run rate.

While the domestic production is steady at a record level, the weaker demand had exerted pressure on net imports across the United States.

The imported acquisition cost of refineries across the United States is on a surge, which is prompting the refineries to reduce the net imports of heavy crude oil, reducing the net imports across the United States.

Since the onset of 2016, the imported crude acquisition cost of the U.S. refineries had been increasing, which coupled with a record production and reduced processing cost on sweet crude oil (available in the United States) has been prompting the refineries to reduce the external imports.

Also, post the implementation of IMO 2020, transportation costs (freight charges) have been increasing for the United States refineries, exerting further pressure on the net imports.

  • Crude Inputs to Refineries Across the United States

The overall inputs of crude oil across the refineries in the United States are declining; however, there has been a slight increase in the inputs in 2020 so far, but the refinery outputs still remain low, which further suggests a stockpile of oil across the United States in the wake of falling demand for petroleum products.

Also Read: Oil Search and Caltex Encountering Weaker Price Challenge Amid Market Disturbance from IMO 2020 and Coronavirus

To summarise, the crude oil is reeling under the double whammy- coronavirus and IMO 2020 reduceding the overall demand for oil products across the globe, and in turn prompted the refineries across the United States to reduce the net external imports (also due to higher freight charges).

The impact of low demand could be clearly evident from the falling inputs of crude across the refineries and decline in net production of oil products.

The low demand scenario is exerting pressure on crude oil prices across the globe, which is already under pressure due to the surmounting oil production across the non-OPEC countries.

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