1. Sunday Night Tweet storm
Many stories are coming out about the reduction in Jet demand will lead to a glut of kerosene. It is very unlikely to happen as refiners will be able to reduce the amount of kerosene production and be able to balance the market
#OOTT
2. How will refiners do this. They will run the gasoline cut and diesel cut differently. Before COVID-19 kerosene was the highest margin product. Refiners had incentives to produce as much as they could. Therefore they did this at the expense of gasoline and diesel.
3. What refiners will do is they will
A) increase the cut temperature of gasoline therefore absorbing the lightest part of the kerosene cut. This could absorb around 10-15% of the kerosene production.
4.
B) decrease the temperature of the diesel cut. This could absorb the heaviest pasty of the kerosene cut. This could be around 15-20% of the kerosene cut.
5. Refiners can also play around with how they operate their hydrocracker, FCCs and Cokers to minimise the amount of kerosene produced.
6. US already showing it is possible and not a problem
US production of kerosene was 1.8mbpd just before COVID-19 affected demand at a refinery utilization of around 90%. Production is currently 600kbpd at 70%
7. Refinery utilization has fallen 22% while kerosene production has fallen 67%.
Last week demand for kerosene in the US was 800kbpd. It indicates that refineries can deal with the fall in kerosene demand without creating a glut.
8. But it does mean refinery utilization will be less as more gasoline and diesel will be produced per barrel than before.
However, one problem going forward will be the crude quality. The vast majority of crude being cut by OPEC+ will be medium and heavy crude oil.
9. Crude from Saudi, Iraq, Kuwait, Canada, Brazil, Iraq, Russia, etc will reduce the amount of residue and middle distillates from the market.
Add in that much of the build in inventories are light sweet crude e.g US, Nigeria, etc. Which have lower distillate and residue
10. This means there could become an imbalance in the products produced in the period until OPEC + finish their cuts.
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