April 20, 2020 [Houston Chronicle] – Oil refineries around the country are scaling back fuel production, amid a coronavirus pandemic that has caused a record drop-off in gasoline and diesel demand.

With engineering limits on how much they can throttle back their plants, some refineries might soon have to shut down all together, as motorists stay home in the weeks or months ahead and the limited storage capacity for transportation fuels nears capacity.

“There will be more (closures) coming at some point,” said Ryan Todd, an analyst with the Houston-based investment firm Simmons Energy. “But all the refineries we talked to in the last week or so, everyone is cutting down to operational lower limits, and that’s about as low as you can go before you have to shut the thing in.”

Already, Ohio-based Marathon Petroleum said it was idling a small refinery in Gallup, N.M. until demand rebounds, following the shutdown of a refinery in eastern Canada last month.

If more refineries shut, that would pose a severe threat to the oil-dependent economy of Houston and the wider Gulf Coast, with thousands of workers clocking in each day at refiners in communities such as Port Arthur and Baytown.

Companies including Houston’s Phillips 66 and San Antonio’s Valero have already announced they are temporarily scaling back fuel production. Valero warned investors this week their margins on fuel, “have been significantly reduced.”

How much more they can reduce their output of gasoline, diesel, jet fuel and other products without shutting down their refineries all together remains unclear.

Typically, the crackers, distillations units and other equipment used in modern refineries are not designed to operate at less than 60 to 70 percent capacity, Todd said. Though some larger refineries, such as those along the Gulf Coast, can operate at less than 50 percent.

As a whole, U.S. refineries have already reduced fuel production by about 30 percent, leaving little margin before facilities would begin stopping operations, said Marc Amons, an analyst at the research firm Wood Mackenzie.

“If demand were to take another step lower you would see a second wave of refiners that would be forced to fully shut down,” he said. “There may be individual refineries already at the tipping point.”

For now, energy analysts are projecting U.S. fuel demand to hit its low this month, with gasoline and diesel sales expected to begin picking up in May and demand beginning to approach normal levels by the end of summer.

But that depends on city and state governments rolling back stay-at-home orders and other social distancing measures as coronavirus cases begin to decline.

At the same time, fuel storage tanks, as with those for oil, are already nearing capacity. On Wednesday, the Department of Energy reported gasoline stocks had risen to more than 260 million barrels, 15 percent above levels a year ago as gasoline consumption plunged by more than 30 percent.

“At current utilization rates, if it was a month or a month and a half, you could fill up inventories and storage,” Todd said. “At some point guys are not going to have anywhere to put their product.”

After a decade of economic growth, during which they enjoyed historically low prices of crude due to the oil boom, U.S. refineries largely came into the year with relatively little debt and plenty of cash to help them ride out the downturn, analysts said.

At the same time they have taken steps to cut their losses by adjusting their refinery equipment to produce less gasoline and more diesel, demand for which has not fallen as greatly, with trucks still needed to deliver food and other good during the shut downs.

ut with massive fixed costs and a large workforce required to run their plants — no matter how much they reduce production — there is only so much cost cutting they can do. Already credit ratings agencies are warning creditors the risk of refineries defaulting on their debt is rising.

On Monday, Fitch Ratings downgraded PBF Holdings, the holding company of New Jersey-based refining giant PBF Energy, and warned it was considering doing the same to Sugar Land-based CVR Energy and Dallas-based Hollyfrontier.

“Although refiners have historically shown an ability to adjust quickly to drops in demand, a key consideration is the unknown duration of the current downturn,” Fitch said.

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