Global oil refining capacity dropped for the first time in 20 years in 2020 and again last year, exacerbating tight markets and volatile prices for fuels such as gasoline and diesel, according to a new report by the International Energy Forum (IEF) and S&P Global.
The Oil Refining Industry Insights report finds that global fuel markets are expected to stay tight for years as new capacity takes time to ramp-up and investments are muted by demand outlooks that show global petroleum demand plateauing.
“I am concerned that investors are holding back from new refinery investments based on decarbonization forecasts that may not be borne out in reality,” said IEF Secretary General Joseph McMonigle.
In both the short-term and medium-term, the balance for global fuel markets will be fragile, underscoring the need to maintain robust inventories and contingency plans to deal with supply disruptions, the report finds.
“The global refining industry is stretched, so unexpected disruptions have a disproportionate effect on prices. Governments urgently need to review their contingency plans to ensure they can cope with the inevitable and I believe more investment will be needed,” Mr. McMonigle said.
A record 3.8 million barrels per day (mbpd) of crude distillation capacity closed between 2020 and mid-2022 as the pandemic weakened margins, accelerated refinery closures, and encouraged the conversion of refineries to biofuels or distribution terminals, the report says.
Refining margins ballooned earlier this year to a record $35-50 per barrel versus a more normal $10 a barrel. The report finds that Russia and China both have available refining capacity, but sanctions limit Russia’s exports and domestic policies limit China’s.
Sanctions and embargos have displaced nearly 3 mbpd of Russian products that are not easily rerouted, and Chinese exports are down 30 percent from 2019 levels as the government has prioritized domestic markets.
More than 2 mbpd in new refining capacity is scheduled to come online by the end of next year, but history shows delays and operational challenges are to be expected.
Looking to the medium term outlook, the report finds significant uncertainty over future demand for conventional refining capacity. Despite high margins, investors are reluctant to commit to new projects because the transition to electric vehicles could make them stranded assets.
Passenger electric vehicle sales are forecasted in different scenarios to rise sharply as policy support continues, costs decline, and more models come to market. Plug-in vehicle sales are forecasted to grow from 6.6 million in 2021 to 35.7 in 2030. This would replace 4 mbpd of gasoline and diesel demand by the end of the decade, and cause hydrocarbon fuels’ share of the transport market to plateau by 2028, the report says.
Energy transitions and decarbonization policies mean the downstream sector will need to reduce yields of gasoline and diesel and increase petrochemicals, the report finds. So, investors are looking beyond the current use cases for how refineries can be repurposed for the transition.
Corroborating the IEF and S&P Global report, the Organisation of Petroleum Exporting Countries (OPEC) in its September 2022 Monthly Oil Market Report released yesterday confirmed that refining margins declined.
OPEC said: “Refinery margins showed diverging trends in August. In the US Gulf Coast (USGC), margins declined moderately, with weakness mainly at the top of the barrel. This was on the back of weaker gasoline domestic consumption which exhibited signs of a slowdown amid concerns over high inflation, economic growth and the approaching end of the driving season.
“In contrast, refinery margins in Europe and Asia reversed trend, following the steep losses witnessed in July. This was mainly reflective of a continued decline in diesel availability, as high operational costs for European refiners due to strong natural gas prices weighed on diesel production.
“In Asia, strong diesel consumption in India and China, and open arbitrage for diesel flows from Asia to Europe, led to significant regional market support that resulted in higher refining gains. Over the month, global refinery runs slightly extended the upward trend, in line with expected seasonality, despite significant unplanned US refinery outages.”
