US refiners hardest hit by economic downturn

US refineries most vulnerable to the economic downturn are those in the East and Gulf coast regions, and these refineries are experiencing utilization cuts and reduced throughputs, according to a recent Wood Mackenzie report.
The report, released during the National Petrochemical & Refiners Association annual meeting in San Antonio, examined refinery utilization in Europe and the US Gulf and East coasts.

Wood Mackenzie found European refiners experienced the smallest reduction in utilization rates at 0.5 %. US refineries along the Gulf Coast reported utilization cuts of about 2.5 % (excluding the impact of the hurricanes in September 2008). East Coast refineries had utilization cuts of 5 % respectively year-on-year in 2008.
The trend is set to continue because of anticipating falling oil demand in the US and Europe where refining margins face short-term pressure.

Alan Gelder, director of downstream oil Americas for Wood Mackenzie, said oil demand growth in 2008-10 will be slower than in recent years.
"Although we expect demand to stabilize by 2010, utilization is expected to remain on a downward trend, because non-refinery supply (NGLs and biofuels) continues to grow, and we also expect new refining capacity to come on stream," Gelder said. Overall, Wood Mackenzie forecasts demand to decline by around 1.1 mm bpd in the US and Europe during 2008-10.

Refinery utilization is expected to face a downward trend while non-refinery supply (NGLs and biofuels) in the US and Europe grow by a combined 400,000 bpd during the same period, mainly because of increased use of biofuels. Refining capacity in these regions is forecast to grow by 900,000 bpd because of refinery expansions, resulting in additional pressure on existing refinery throughputs, he said.
Wood Mackenzie believes a substantial reduction of throughputs in the US and Europe will be necessary. This could equate to an average reduction in utilization of 5 % in addition to the reduction already experienced in 2008.

The complexity of refineries in each region has a potential impact on their vulnerability to cuts in throughputs.
"As demand falls, the impact on crude throughputs is felt first by those refiners with relatively simple capacity," Gelder said. "This is because simple refineries produce a higher proportion of relatively low-value products such as fuel oil, and therefore typically achieve weaker margins." More complex refineries are likely to be able to maintain higher rates of utilization, he said.

Historically many US refineries have been geared up to maximize gasoline production but Wood Mackenzie anticipated that a potential global surplus of gasoline and falling US gasoline demand leaves these refineries more susceptible to utilization cuts than their European counterparts.
"By comparison European refineries have a competitive advantage to supply these markets as they are protected by their stronger middle distillate prices, due to the European diesel deficit," said Gelder.