The global refining sector has been severely hit by the outbreak of COVID-19 pandemic with dramatic cuts to fuel demand. In 2020, global oil demand was ~ 91.3 million barrels per day (MMbpd), almost 9% lower year over year. Most of the fuel demand destruction came from the transportation sector as countries across the world began to impose lockdowns for containing the virus. This led to an oversupply of fuels in the market with rising inventories impacting refining margins severely. In response, refiners across the globe lowered their utilization rates, shifted product yields, cut growth and sustaining capital spending, deferred turnarounds and growth projects, and accelerated decisions to shut down refineries or convert them into renewable fuels plant and terminals.
While global fuel demand continues to remain subdued, some regions are facing more hurdles than others with the resurgence of a new strain of COVID-19 and new lockdowns. On the flip side, recent progress in approval and administration of different COVID-19 vaccines and government stimulus programs coupled with eased lockdowns in major Asian economies have shown signs of hope which can support both the global economy and fuel demand going forward. Against this backdrop, we share ADI's research and outlook for the refining sector in 2021 and beyond.
- Fuel demand will pick up but will likely not reach the pre-pandemic level until 2023.
Global fuel demand destruction for gasoline and diesel has fallen in the second half of 2020 with easing lockdowns. Growing personal preference for road travel over air travel has supported gasoline demand while significantly distressing jet fuel demand. Further, e-commerce related trucking activity has kept diesel demand fairly consistent. In the fourth quarter of 2020 global fuel demand was down only ~ 6% year-over-year at 94.7 MMbpd which is expected to rebound by 5.6 MMbpd in 2021 and achieve pre-pandemic level of recovery by the end of 2023.
- Jet fuel demand will take longer to recover than gasoline and diesel demand.
In 2021, fuel demand is expected to reach 97% of the pre-pandemic level except for jet fuel that will likely continue struggling due to lower business travel and a slowdown in tourism. Domestic air travel in the U.S. is expected to reach pre-COVID levels faster than international travel but the recovery may not match 2019 levels until 2023.
- Some regions will recover faster than others in the wake of COVID-19 vaccine rollouts and uptick in economies.
Fuel demand recovery will be faster in Asia in comparison to other regions. Strong demand growth to pre-pandemic levels in countries such as China, India, Brazil, Saudi Arabia, and Australia will support overall global fuel demand in 2021. But recent lockdowns in European countries such as the United Kingdom, Germany, and Italy and strict socializing restrictions in the U.S. will put downward pressure there. Overall, availability and successful administration of COVID-19 vaccines will also differ by region resulting in faster recovery of refining in some parts of the world than others.
- Global refinery utilization will also pick up but face hurdles due to fuel oversupply.
Refineries across the world reduced their throughputs in the second half of 2020 amid falling fuel demand, rising fuel inventories, and dipping refining margins. In 2020, global refinery utilization rate averaged ~ 72%, the lowest over the past few decades in spite of refiners shifting product yields from distillates to gasoline and vice-versa in 2020 were insufficient to cope with fuel oversupply. Moving forward in 2021, global refinery utilization rate is expected to pick up averaging 75%-80% supported by increase in demand for both gasoline and diesel coupled with supply reduction from shutdowns of less profitable refineries. However, as new refining capacity comes online in emerging economies, refinery utilization will continue to face hurdles and may not hit pre-COVID levels anytime soon.
- Permanent refinery closures and conversion to renewable fuel plants will support refining margins.
Several refineries across the globe have faced temporary idling or permanent closures in 2020 and the trend will accelerate in the near future. Refiners with weaker liquidity and unprofitable facilities will remain at the high end of the risk curve and the ones which directly serve regions with strong regulatory support for renewable fuels and electric vehicles such as Europe and the U.S. West Coast will struggle the most. Some of these refineries are also considering conversion into biofuels plants to capture higher margins through government-backed subsidies. Collectively, they will have a positive impact on overall global refinery margins to some degree going forward.
- But new capacity is coming online and may outweigh closures and conversions in 2021 and beyond.
Significant new refining capacity will come online in Asia and Middle East in 2021 and beyond likely oversupplying fuel markets in the near term. These regions account for over 65% of the global refining investment in past five years with most of the capacity already under construction. As these new refineries will have higher complexity and economies of scale to increase production of higher-margin oil products meeting both fuel efficiency and emission standards as well as low-sulfur fuel demand, existing marginal refineries will likely face greater threats of closures moving forward. Further, this will also have an impact on countries exporting fuels to these regions.
- Petrochemicals integration will increase profitability of complex refineries and some refineries will continue with crude to chemicals conversion bypassing fuel production completely.
Growth in demand for packaging and durable goods supported by emerging economies will increase profitability of highly integrated complex refineries due to diversified earnings from both fuel and chemical sales. But as gasoline and diesel demand face challenges from rising share of electric vehicles, renewable energy sources, and liquified natural gas in the road and marine transportation and industrial sectors, most of these complex refineries are evaluating direct crude to chemicals projects without any production of other transportation fuels.
- Refinery sales and upgrades will also pick up with consolidation happening mostly amongst majors and national oil companies.
Global refinery sales and upgrades slowed down in 2020 due to limitations resulting from the COVID-19 pandemic. However, over the next five years we will see some of these projects moving forward especially in Latin America and the U.S. Gulf Coast as a part of consolidation and rationalization of their refineries. National oil companies will sell their unprofitable refineries and shift focus to upgrades and utilization of their well-positioned refineries. Further, some oil and gas integrated majors will consider selling their refineries to focus more on their upstream businesses and renewable energy initiatives to meet low carbon emissions pledge. Further, many small players will remain on the verge of bankruptcy if fuel demand recovery takes longer than anticipated.
- Refiners will continue to cut capital and operating expenditures and defer most of their growth projects to late 2021 or beyond but will go forward with deferred turnarounds from 2020.
With lower refining margins resulting in earning losses quarter over quarter in 2020, many refiners have announced cuts in capital spending year over year in 2021 and have plans to shift focus towards increasing overall operational efficiency and minimizing operating costs at their facilities. Further, refiners will keep capital spending only for sustaining businesses including turnarounds while deferring other non-essential growth projects until full recovery in fuel demand is realized. Most of the incomplete refinery turnarounds planned in 2020 will be rolled over to the second half of 2021 and in 2022.
- Energy transition will put downward pressure on fuel demand recovery to 2019 levels in Europe and parts of Asia, Australia, and North America
Several major economies have pledged net-zero carbon emission over the past few years. For instance, countries such as China, South Korea, Japan, and U.K. have plans to reduce their carbon footprint over the next decade and will increase share of renewable energy sources in the fuel mix. This will negatively impact oil products demand in the near-to-medium term.
In summary, there are several factors that come into play when we talk about complete fuel demand and refining margin recoveries in 2020 and beyond. While some factors will support fuel demand in the near-term others will have negative impact on it. The trajectory of fuel demand will be shaped by vaccine roll-outs and containment of the virus and refiners across the globe will continue to focus on cutting capital spending and focusing on only the high-valued essential projects. ADI tracks and monitors the downstream and refining sectors closely and you can access our insights by subscribing to the ADI Downstream Market Advisory service.
– Swati Singh and Uday Turaga
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