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Storms gather for refiners

Oil will remain the lifeblood of the transport sector for years, but refiners must prepare for its slow demise

The relatively low price of refined products across global markets, and particularly in the US, should ensure that refineries continue to experience strong demand for their output over the coming months. The longer-term picture is less certain.

Demand for transport fuels has been firm in US and Asian markets largely because lower crude prices have translated directly into lower gasoline and diesel ones. Even in Europe, where higher fuel taxes limit price falls, consumption has ticked up.

But the burst in demand since 2014 might be petering out, if only because there is a limit to how many extra miles motorists are prepared or able to drive, just because gasoline or diesel is cheaper.

Increased fuel demand in the US has also been driven by higher employment, leading to more driving to work. But expansion of employment numbers—already running at a slower monthly pace now than during the Obama years—can't last indefinitely. In Europe, economic recovery and more trade has helped support gasoline and diesel demand.

Wood Mackenzie forecast in July that global demand for crude from the refining sector will grow by more than 1.4m barrels a day in 2017, with diesel and gasoil up 280,000 b/d in 2017, following a 200,000 b/d decline in 2016.

Much further ahead, though, and predictions get less reliable. Most major economies are introducing more stringent fuel efficiency rules. The UK and French governments have said they will ban the sale of new gasoline and diesel cars by 2040. Even in the US, many states remain committed to reining in fossil fuel use—whatever the attitude in the White House. Most major car makers the world over have plans to bolster their electric vehicle (EV) production over the next decade.

The rise of pure EVs may not make serious inroads into gasoline and diesel demand for another 15 years, but increased use of hybrids and better-performing internal combustion engines (Ice) will have a shorter-term impact on refined product demand, notably in the US and Europe, but also China and other emerging markets as well. BP, for example, forecasts that while EVs will shear 1.2m b/d from oil-demand projections by 2035, more efficient Ice cars will remove 17m b/d.

In Europe, refiners should actually get a boost from negative publicity surrounding the harmful effects of particulates emitted by diesel engines. The continent has more refining capacity dedicated to gasoline production compared to diesel, despite the strong growth in diesel consumption over the past two decades. Fuel retailers relied on diesel imports rather than developing refining capacity. Now European refiners are experiencing more demand for gasoline products.

European refiners are aware they are in a declining business. They and their US counterparts know they need to boost exports to growth areas such as Asia to survive.

"Efficiency gains in the transport sector, whether from EVs or improved Ice mean demand will fall in Europe and the US, so in five or 10 years' time we should see a need to close even more refineries," says Jonathan Leitch, a refining and oil product markets analyst at Wood Mackenzie.

Breaking the cycle

The weak long-term demand picture means that the established cyclical pattern of refining capacity expansion is breaking down. In the past, a boom period for the industry would have prompted heavier investment in new capacity which would have come on stream some five years later. Conversely, a weaker market tends to restrict investment—hence a relative dearth of new capacity becoming operational now in some regions.

Companies are likely to be a lot more cautious this time around, despite their high margins. Hotspots are likely to be restricted to developing countries with burgeoning demand, as in Asia, and those keen to bolster refining capacity for local reasons, such as a desire to add value to locally produced oil and create jobs, as in the Middle East.

In regions where demand is under pressure, refiners in the best position will be diversified firms with tentacles that stretch across the supply chain.

Hungary's Mol hopes to capitalise on its strength in the countries of its central European heartland to prosper. Ferenc Horvath, heads of its downstream activities, told Petroleum Economist that his company has had to become much more fleet of foot in order to survive.

Mol plans to increase the proportion of its products aimed at the petrochemicals industry compared to transport fuels. It is also seeking to compete harder for its share of the customer base by upgrading its fuel retailing operations in the 1,900 service stations across eleven countries in its network—and that includes EV charging facilities.

Downstream companies everywhere are looking for ways to maximise revenue streams in what is destined to become a shrinking market for refined transport fuels. But for refiners without these kinds of diversified activities the choices in the future are likely to be somewhat starker.

 This article is part of a report series on Global Refining. Next article is: End of a golden era for refiners?

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