Falling prices for crude oil are usually a good thing for global refiners - except when nobody is driving.
Worldwide, refineries are slowing output and contemplating extensive maintenance due to travel restrictions put in place in response to the coronavirus pandemic.
Gasoline demand in the United States, the world's largest oil consumer, is plunging. International flights are being grounded worldwide, slamming jet fuel demand.
Margins for producing transportation fuels turned negative in Europe and Asia, and briefly did the same in the United States, in a rapid response to international and domestic travel restrictions in scores of nations worldwide.
"What we are seeing is nothing short of unprecedented," said Tom Kloza, founder of the Oil Price Information Service, adding that demand destruction during this pandemic has exceeded what was seen in the wake of Sept. 11 and other disasters.
Crude oil prices have plunged this year, most recently after Saudi Arabia and Russia failed to reach agreement on limiting supplies. Both US crude and international benchmark Brent have tumbled below $30 a barrel.
This would have been a boon for refining margins - but prices on gasoline and jet fuel have plummeted even faster this week, sapping refiners' profitability.
Traders, all speaking on condition of anonymity, said it was extremely difficult for refiners to plan run rates due to daily changes in the situation. On Tuesday, Phillips 66 cut production at its Los Angeles refinery due to loss of demand, according to a source. The company declined comment.
Refineries must choose between extending maintenance while margins are so poor or ramping up to take advantage of cheap crude to fill up storage with refined products. However, once storage has been filled, refining rates would have to fall sharply, due to lack of demand.
In Europe, refiners are losing nearly $7 on every barrel of gasoline they produce, an 11-year low. Differentials for jet fuel cargoes also fell to a record low.
Asian refiners are producing gasoline at a loss of 78 cents a barrel of Brent crude, lowest in 13 months.
US gasoline refining margins RBc1-CLc1 fell a whopping 95 percent on Monday to settle at 28 cents per barrel, lowest since December 2008. On Tuesday, they rebounded, but were still at a meagre $2 per barrel.
Asian refining margins for jet fuel JETSGCKMc1 plunged to $4.71 per barrel over Dubai crude, lowest ever based on Refinitiv data going back to March 2009. They were at $7.70 on Friday. In the United States, jet fuel prices when compared with the heating oil benchmark were at lows not seen since 2011 in both New York and on the Gulf Coast.
"When crude prices fell heavily early last week, it gave an incentive to refineries to keep runs unchanged. Eventually, with the virus-related situation developing, it's now the second time for global refineries to think of run cuts," a Seoul-based middle distillates trader said.
BIG SPENDING, TOUGH TIMING
Numerous refiners have invested in costly large-scale projects to capitalise on projected increases in demand for low-sulfur shipping fuel in the first half of 2020 due to new maritime regulations limiting the use of high-sulfur fuels.
Now, though, those refiners may be particularly hard hit, as the virus has curtailed cruises and global shipments of goods.
"Refiners that invested in sophisticated upgrading equipment to produce low-sulfur fuel oil for ships may suffer another blow," said Phil Verleger, a veteran oil economist and independent consultant, in a note.
For example, PBF Energy's market capitalisation fell to less than $1.3 billion on Friday, just $300,000 more than it paid for Shell's Martinez refinery earlier this year.
Following that purchase, PBF laid off members of its commercial business development team, according to a person familiar with the matter. The team had been looking strategic projects, acquisitions and other new business opportunities for the company.
PBF did not respond to a request for comment.
Italian energy group Eni said on Tuesday all its refineries in Italy were working normally except for two that had cut volumes for maintenance.
A spokesman for Repsol said the Spanish refiner had activated a global plan two weeks ago to ensure normal operation at all its facilities.
"Currently, oil products demand is decreasing and our refineries will adapt to this market situation at all times," a spokeswoman for Spanish refiner Cepsa said.