Stretched oil refining capacity to keep global fuel markets fragile

According to a report by the International Energy Forum (IEF) and S&P Global, global fuel markets are expected to remain tight and prices volatile for years as oil refining capacity remains tight.

The Oil Refining Industry Insights report finds that adding new capacity is taking time and investment is being dampened by a demand outlook that points to a plateau in global oil demand.

“I am concerned that investors are reluctant to invest in new refineries because of decarbonization projections that may not materialize in reality,” said IEF Secretary General Joseph McMonigle.

The balance in global fuel markets will be fragile in the short and medium term, underscoring the need to maintain robust stockpiles and contingency plans to deal with supply disruptions, the report says.

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“Unexpected disruptions have a disproportionate impact on prices. Governments urgently need to review their contingency plans to ensure they can deal with the inevitable and I believe more investment will be required,” McMonigle said.

refinery capacity deficit

A record 3.8 million barrels per day (bpd) of crude oil distillation capacity was shut down between 2020 and mid-2022 as the pandemic eroded margins, accelerated refinery closures and encouraged refineries to switch to biofuels or distribution terminals, the report said .

Refining margins rose to a record $35-$50 per barrel earlier this year versus a more normal $10 per barrel. The report notes that both Russia and China have available refining capacity, but the sanctions limit Russia’s exports and China’s domestic policies.

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Sanctions and embargoes have displaced nearly 3 million bpd of Russian products that cannot be easily diverted, and Chinese exports are down 30 percent from 2019 levels as the government prioritized domestic markets.

More than 2 million bpd of new refining capacity is slated to come online by the end of next year, but history shows delays and operational challenges are to be expected, the report said.

Reluctant Investors

The report notes significant uncertainty about medium-term demand for conventional refining capacity. Despite high margins, investors are reluctant to invest in new projects as these could become stranded assets due to the shift to electric vehicles.

In various scenarios, EV car sales are forecast to increase sharply as political support persists, costs fall and more models enter the market. Plug-in vehicle sales are forecast to increase from 6.6 million in 2021 to 35.7 in 2030. This would replace 4 million bpd of gasoline and diesel demand by the end of the decade and cause hydrocarbon fuels’ share of the transportation market to plateau by 2028, the report said.

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Energy transition and decarbonization policies mean that the downstream sector must reduce yields of gasoline and diesel and increase petrochemicals, the report says. So investors are looking beyond current use cases to see how refineries can be repurposed for the transition.

(Writing by Sowmya Sundar; Editing by Anoop Menon)

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