A detailed assessment of the mid/long-term operating environment for global refining and the implications for the oil products trade. We forecast products demand and review refinery investments to identify the likely pressures on the refining sector and what this could mean for refining margins in the next 5-10 years.
Refiners are currently enjoying all-time high refinery margins due to a combination of the following factors:
- COVID-19 speeded up or forced many refinery closures for a variety of reasons: the prospect of low margins, the high cost of staying in business, growing pressure from investors and wider society to move away from hydrocarbons to greener, renewable fuels etc. During 2020-2021 over 3 mmb/d of global refining capacity was closed. That is likely to grow to 4 mmb/d by the end of 2022, with the prospect of around 500 kb/d more closures to come in 2023 (and yet more to follow in 2024 and 2025).
- Some new capacity has been built but a lot of it is in China and is not accessible to international product markets due to reduced national product export quotas.
- Some new capacity has also been delayed – mostly a casualty of the pandemic.
- Excluding China, there is now almost 2 mmb/d less installed refining capacity globally than in 2019.
- Product demand is recovering from the COVID-lows and while overall, demand is not yet back at 2019 levels, global mobility has risen significantly and industrial demand now exceeds pre-COVID levels. Demand for gasoline, jet and gasoil/diesel is growing strongly.
This all comes at a time when product exports from China are down due to lower export quotas; about 200 kb/d lower than 1H 2021 levels for gasoline and 380 kb/d for diesel.
Western sanctions on Russia following its invasion of Ukraine could reduce Russian crude and product exports. Some 700 kb/d of diesel exports to Europe are threatened, as well as exports of naphtha and fuel oil. However, there seems to have been little reduction so far, although the EU’s new products sanctions due to start in February 2023 may have an effect. Meanwhile, operators have been creative to keep Russian barrels moving and are so far keeping one step ahead of politicians and rule makers. Nevertheless, the threat of disruption is there and supporting transport fuel markets adding a significant “war premium”.
In summary: resurgent global oil demand, less refining capacity (and a lot of nominal spare refining capacity remaining inaccessible), plus the prospect of further product supply reductions due to sanctions are all pushing prices and margins upwards.