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 high refinery margins due to a combination of the following factors:
- COVID-19 sped 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 2020-2023 over 4 mmb/d of global refining capacity was closed. More closures will follow in 2024-2026.
- New capacity has been built, 80% of it East of Suez. China continues to build new capacity but controls throughput and utilisation via crude import and product export quotas.
- Looking ahead, almost all new capacity is focused on Asia with India taking over from China as a refining hotspot. New capacity in the Middle East is limited but the region does have some potential for new projects.
Though crude and product sanctions on Russia are limiting its export income, it does not appear to be having too much trouble finding customers for its hydrocarbons, a situation we expect to continue.
Overall, refining capacity and demand growth are well matched for the next ten years. Consequently, we continue to forecast a very positive margin environment for refiners over the next 10 years or so.
What happens after that depends on just how quickly demand moves away from fossil fuels to renewable fuels.
Our base forecast reflects the impact of a ban on new internal combustion engine cars in Europe and the US (and other countries) from the mid-2030s as well as increasing amounts of sustainable aviation fuel and renewable diesel entering the market.
We have lowered our demand forecast from our previous edition, accordingly, leading us to forecast that global peak demand will occur in the late 2020s and that global refinery runs will be around 78 mmb/d by 2040 and 71 mmb/d by 2050.
But it is a tale of two halves, with the changes happening much more quickly in Europe and the US than East of Suez (where demand continues to grow throughout the 2030s).
In summary, large scale capacity closures will be needed in the Atlantic Basin from the mid-2030s onwards, lasting throughout the 2040s and beyond. Similar pressures and closures will take place in Asia from the 2040s onwards.
Such pressures are not new to refiners, who have always adapted to their margin and legislative environment. The next generation will face these challenges knowing the era of fossil fuel dependence is coming to an end, but also aware that this is still some way off.
In the meantime, the margin environment will continue to reward refiners, especially the more commercially savvy ones.