Global refining industry braces for a volatile outlook

HOUSTON (ICIS)–As oil and gas continues its slow recovery due to lacklustre demand for gasoline and other refined products, the refining industry is bracing for what could be a volatile outlook in the near future.

“We expect global refinery utilisation to recover only modesty from the Covid-19 [coronavirus] blows of 2020,” said Alan Gelder, vice president of Refining for Wood Mackenzie, in Reuter’s Downstream Leadership Forum.

Globally, refined products consumption fell by almost 30% in Q1 and is projected to be 91.9m bbl/day in 2020, down 8% year on year, according to a recent Deloitte study.

Lower prices have led to lower refinery utilisation and shifting yields, translating into lower downstream revenues and margins, bringing refinery utilisation back to the 1980s.

The 1980s were a period of extensive refinery rationalisation as oil demand collapsed from high prices in the previous decade.

Oil and gas demand has been hit hard as a result of the lockdowns from the coronavirus pandemic, and the simultaneous production increases and price cuts by the Organization of the Petroleum Exporting Countries (OPEC).

Demand for jet fuel has also remained anaemic, with US demand still half of its pre-coronavirus levels as many people defer air travel.

Inventories are also not expected to fall back to normal levels until well into 2021.

“There was over-capacity in refining before the crisis, lower demand just makes it worse,” said Gelder.

The uneven recovery will likely result in refined product demand to vary by region over the next few years, with some countries containing the virus whereas others struggle with second and third waves of infections.

As demand recovers, refiners will need to keep costs down and consider opportunities for outperformance, such as digital acceleration, to survive, said Mathew George, General Manager of Petrochemicals for Indian Oil.

However, current unfavourable market conditions could result in many assets at risk of closure over the next few years, with Europe and Japan at most risk of extensive rationalisation.

Volumetrically, the US has almost 400,000 bbl/day at risk of closure in addition to the almost 400,000 bbl/day converted to biodiesel, according to Gelder.

Downstream companies also face long-term challenges from the ongoing energy transition as consumers and investors push toward reducing carbon emissions, including the more widespread adoption of electric vehicles and stricter fuel economy regulations in the US.

These factors could have the potential to incentivise reconfigurations in refineries to make biofuels.

Click here to view the ICIS Coronavirus, oil price crash – impact on chemicals topic page.