Vaxications, a Texas Deep Freeze, and Summer Driving Season – finally a booster shot for refining margins?

Last time I wrote (January of this year) we were in the midst of the second wave of Covid-19 in many places around the world and things were not looking so great for refining margins once again. In the last two months things have really changed for a few key reasons which I will detail below, resulting in a relatively rosy outlook for refining this summer in my opinion. So what changed?

Vaccinations Pick Up Pace…leading to vaxications!

If you have been keeping up with the news (or competing for a vaccine yourself) you know that at least in the US we have three viable vaccines for Covid-19 which are being distributed at an impressive pace. In the past couple weeks this rate of vaccination has picked up to over 2.7 million doses per day in the US per CDC data (see chart below) and even President Biden has called for vaccinations to be open to everyone by May 1st.

Figure 1: Vaccinations pick up pace quickly in the US. Source: CDC

I must admit, I didn’t come up with the term vaxication, really a bummer for me. As you might expect, as people get vaccinated there is pent-up demand to get out of the house and explore again – just because you can (kinda). There may still be mask requirements and restrictions, but fear of severe illness may suddenly not be an issue for many. This effect should lead to an uptick in recreational travel.

This uptick in travel should directionally help gasoline and jet demand. Does jet recover back to pre-covid levels from this? I do not think so – we have lost a lot of business travel that I think might take some time to come back – if it ever does. People have learned new ways to work that could permanently dent the air travel market. My advice for the recreational travelers is to book up those vaxications soon, as airlines may seek to make up their losses in business travel with higher price tags on leisure destinations.

Texas Deep Freeze rattles refining, petrochemicals and natural gas

As a resident of Houston, I am quite familiar with what happened here the week of February 15th. Not only did residents (and industry) of Texas see widespread blackouts of the ERCOT electrical grid, there were effects on many industries even outside of Texas due to freeze-offs in the Permian basin which crimped oil and natural gas production in the prolific oil producing region. You probably know plenty about what all happened, and I will avoid recounting my personal stories of coping with it with our 7-month-old twins. Instead, here is a chart of refining inputs in the US:

Figure 2: US refining inputs data shows a significant impact from the Texas freeze event, reducing nationwide inputs by 4.9MMBPD. Source: EIA data

As if a drop in refining inputs of almost 5 million barrels per day (imagine 10+ of the largest refineries offline) wasn’t enough, the curtailments and price spikes in natural gas resulted in nearly every steam cracker and even other types of chemical plants shutting down as well. Literally any option to get natural gas or electricity back on the grid was on the table as people froze to death in their homes – this effect was wide reaching (in terms of natural gas) in that it significantly affected PADD 2 (Midwest) as well.

Due to these massive amounts of capacity offline, stocks of gasoline and diesel have been drafting heavily, as illustrated in the figures below from the EIA. This should position the market for higher prices given the sudden reduction in products stocks this has caused. We have not even seen the end of these drafts as of early March, so I expect them to possibly extend through driving season (more on that below).

Figure 3: Gasoline and diesel stocks have seen huge withdrawals since the freeze. Gasoline stands to start the summer well below the 5-year band. Source: EIA

Summer Driving Season Returns?

Last year we did not have too great of a summer driving season as most places had their “closed” sign out due to Covid-19. This was especially true early in the pandemic when people were not really sure how it spread or if maybe they could keep it out of their community by banning outsiders. This year will be different. It would have been different even without vaccines, just due to better understanding of measures to control the spread of Covid-19.

With much of the population expected to be vaccinated by July 4th, I would expect a normal if not better than usual summer season as people who have been cooped up get out and explore the world again.

If you layer that normal-ish demand on top of the stocks position and refinery closures that happened during the pandemic, I think gasoline (and possibly diesel) will be a hot commodity this year, driving refining margins up to supply the returning demand from a short stock position.

An Opportunity

There should be money to be made this year in refining, and in petrochemicals as well given the outages that have happened. Operators that are positioned to respond when the market changes quickly and execute their highest profitability strategies efficiently will have an advantage at capturing this recovery in spreads that I think is coming this spring and summer.

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