Marathon Petroleum ramps up Q2 rates to meet strong ULSD, gasoline demand

Marathon Petroleum, the largest US refiner, is ramping up rates at its refineries, with expectations of reaching 95% capacity in the second quarter to meet the rising demand for both diesel and gasoline as the summer driving season looms.

The company is deferring some planned work to capture the strong current spot market environment, "backloading" the company's 2022 turnaround work, according to Ray Brooks, Marathon's head of refining, on the May 3 results call.

"With current demands, we are really seeking to maximize our refining system as indicated by the second-quarter guidance," Brooks said, adding, "what this really means...is that we've looked at some fixed bed catalyst changes that we had planned for [Q2]. We've determined we have a little bit as far as catalyst activity. So we've deferred that out later in the year.

"We're working right now to maximize distillate production across our system. Just to give you a little more color on that, that's something that we look at daily, make sure that we're maximizing the total recoverable distillate, the endpoint, and maximizing the front end of the distillate," he said.

Increased ULSD exports tighten the USAC market

Marathon, like its peers, has been running in maximum distillate mode to take advantage of global rising diesel cracks from tight supplies and backwardation in distillate markets.

The company's total exports averaged 200,000 b/d at the end of Q1 and have moved up to an average of 250,000 b/d and 300,000 b/d so far in Q2, with barrels moving primarily into Latin America, but with some barrels moving to Europe.

Brian Partee, Marathon's head of clean products, said that increased distillate exports have tightened the US Atlantic Coast market, which is seeing lower European imports as well as lower flows up the Colonial Pipeline, the main conduit of refined products from the USGC refiners to New York Harbor.

But this is a function of timing, and the "run-up in the prompt front end of the cycle," he said, allowing Marathon to capture current high diesel prices immediately through export rather than waiting for the time it takes diesel to move up the Colonial Pipeline.

However, that dynamic is beginning to ease as the spread between the price of US Atlantic Coast ULSD and USGC export diesel is widening, drawing imports into the USAC.

Platts assessments showed USAC ULSD diesel barges held a 91.4 cent/gal premium of USGC ULSD export price May 2, compared with the 33 cent/gal premium so far in 2022.

"I think you're reading the tea leaves right as you look forward and think about less Russian exports and European complex starting to find a way to rebalance the New York Harbor market," he told an analyst on the call, adding the Colonial Pipeline is a "forward opportunity, more structural and longer term," he said.

Unusual times

Restrictions on Russian petroleum exports following its incursion into Ukraine in February have had a particular impact on the global diesel supply. Russian middle distillate exports, which averaged 1.1 million b/d in February, fell to 943,000 b/d in March and 868,000 b/d in April, Kpler data showed.

The extreme volatility with distillate cracks and the backwardation of distillate markets is creating an unusual situation in oil markets at a time when refiners historically switch to maximum gasoline mode to build up inventories, which are lagging the five-year average. Total US gasoline inventories stood at 230.8 million barrels for the week ended April 29, according to the most recent Energy Information Administration data.

However, like its peers, Marathon is constantly looking at the economics of making diesel versus making gasoline as it prepares for the summer driving season looming at the end of May with the Memorial Day weekend, while looking to take advantage of the backwardation in the diesel market.

"Our plan right now is to run really, really full, and run really, really hard during gasoline season this year," Brooks said.