We Just Disagree - Our Contrarian Take on Refining Capacity, Product Demand and Other Matters

The last few years have been filled with often-spirited debate about the global energy transition and the move away from fossil fuels to fully embrace renewables and alternatives to keep the lights on, fuel vehicles and power the world’s economy. But there are a growing number of signs that a swift shift from petroleum is not realistic, which has implications in many areas, including which refinery expansion projects move forward (and where), when oil demand might peak, and which of the many forecasts for gasoline and distillate production will prove to be the most accurate. In today’s RBN blog, we discuss highlights from the new Future of Fuels report by RBN’s Refined Fuels Analytics (RFA) practice, including RFA’s expectations for how a slower transition might affect producers, refiners and consumers. 

A wide range of ever-changing economic and other forces — domestic and international — are constantly impacting the U.S. refinery complex, for good and for bad. Fluctuations in crude oil supply and prices. Ups and downs in demand for refined products. Refinery closures and expansions. And don’t forget this: the pace of the much-discussed transition to lower-carbon energy sources. There’s a lot at play in the world of gasoline, middle distillates and resid — renewable fuels too — and while industry players can’t fully anticipate what’s next in the refined-product roller coaster ahead, it’s critically important to keep up with the latest developments and to have a deep understanding of the many factors influencing crude oil and fuel markets — and the relationships among those drivers. In today’s RBN blog, we discuss the key findings in a newly released update to Future of Fuels, an in-depth report by RBN’s Refined Fuels Analytics (RFA) practice on everything you need to know about U.S. and global supply and demand for gasoline, diesel, jet fuel and biofuels over the short, medium and long term.

U.S. refiners have been enjoying some very good times the past couple of years. Most important, refining margins have soared due to a tight global product supply/demand environment brought on by, among other things, the post-COVID demand recovery, refinery shutdowns, Russia/Ukraine war effects, and high natural gas prices. Traditionally, the bulk of refining margins have come from (1) robust “crack spreads” (the general yardstick for measuring overall refining sector health, simply by taking the difference between a basket of refined products and key light sweet crude markets like WTI Cushing or MEH) and (2) the lower crude-input costs that many refineries benefit from, either because of location-related advantages or their ability to process lower-cost crude like medium and heavy sours. But location discounts have narrowed in recent years due to the buildout of pipelines and, as we discuss in today’s RBN blog, the big quality discounts that complex refiners relished through much of last year and the first few months of 2023 have withered. The question is, why?