Middle distillates take centre stage
Oil-product demand, especially for middle distillates, is rising more quickly that processing capacity. It's good news for refiners
Most oil refiners should be able to look forward to a period of comfortable margins and high capacity use, as consumption rises more quickly than new nameplate capacity and the demand barrel shifts to favour middle distillates, industry officials and analysts say. But they caution that the market won't let the good times roll for everyone.
"Margins should generally, globally be pretty good, but it'll depend on where you are," says Alan Gelder, head of consultancy Wood Mackenzie's refining, chemicals and oil markets division. He and others point out that while the industry can be expected to get a boost from growing petrochemicals demand and an expected shift to middle distillates from fuel oil in 2020, individual refiners' fortunes will hinge on whether they can meet demand for these products.
The past two years have been good to most refiners. On a monthly basis, cracking margins for Brent in northwest Europe haven't fallen under $2.80 a barrel since January 2016, according to the International Energy Agency (IEA). In Asia-Pacific, the IEA calculates Dubai cracking margins varied between $2.91 and $7.80/b over the same period, while in the US Gulf Coast cracking margins for a blend of domestic LLS and HLS fluctuated between $3.93 and $14.38/b. US Mid-Continent margins exceeded those elsewhere by a large margin throughout the period. Margins everywhere peaked just after Hurricane Harvey hit the US Gulf Coast last summer, disrupting major swathes of American refining and logistics.
Wood MacKenzie believes the period through the 2022s will be comfortable, though not stellar. Its Global Composite Margin, which provides an indicator of world refinery margins, will average $5.40/b in 2022, dropping from a forecast peak of $6.50 in 2020 and $6.40/b last year. In a recent report forecasting a "Silver Age" for world refining, Morgan Stanley notes that in 2018 only about 800,000 barrels a day of new refinery capacity is expected on stream, compared with expected demand growth of around 1.3m b/d. The IEA estimates that refinery capacity utilisation in the OECD countries is already running at 88%. Meanwhile, Gelder at Wood MacKenzie sees Chinese capacity use at about 70%, while Mideast refineries are running at about 80% capacity.
Refining margins are widely expected to be supported by a shift in the demand barrel towards middle distillates from the shipping industry. The International Maritime Organisation's Marpol Annex VI regulations mandate a worldwide shift by 2020 in the sulphur content of marine fuels to 0.5% sulphur from the current maximum 3.5%. Many think prompt compliance with this regulation will entail a significant shift in demand to diesel, from high-sulphur fuel oil, and market forward curves are already shifting to reflect this. The change is likely to benefit refiners with high conversion capacity that can process crudes with high middle-distillate yields. Less sophisticated plants won't be able to take advantage of the boost.
Some in the market believe the shift to gasoil from fuel oil by the maritime sector may be balanced by some headwinds. An expected boost to demand for feedstock from the growing petrochemicals industry may benefit refiners less than expected as natural gas liquid availabilities increase with a continued rise in American tight oil and shale gas production, pressuring naphtha prices.
Others note US refiners have benefitted from lower throughput in Latin American refineries, particularly in Mexico, Venezuela, and Brazil. According to the US Energy Information Administration, the country's gasoline exports to Mexico alone were running over 600,000 b/d in late 2017, or 60% of the total. An official with a European refiner notes that while middle distillate inventories in major markets are currently under their five-year averages, light distillate inventories are above that average. The refiners' margins party may be spoiled by a gasoline hangover.
This article is part of an Report series on Refining. Next article: Global refining capacity is going to keep growing