Over the next couple of years — and the next couple of decades — global supply/demand dynamics in refined products markets will be driven by two critically important factors. The first is the understandable reluctance of refiners to expand capacity in the face of climate policy and ESG headwinds. The second is a growing gap between policymakers’ aggressive energy-transition goals and the global pivot to a renewed focus on energy security brought about by the Russia-Ukraine war and worries about China’s global ambitions. These factors, which will fuel the prospects for constrained supply and higher-for-longer demand, have far-reaching implications, not only for refinery owners but also for E&Ps, midstreamers, exporters, energy industry investors and policymakers, all of whom need to gain a clearer understanding of what’s just ahead — and what’s over the horizon, just out of sight. In today’s RBN blog, we discuss key findings in “Future of Fuels,” a new, in-depth report by RBN’s Refined Fuels Analytics 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.
Warning: Today’s blog is a blatant advertorial for the “Future of Fuels” report. Still, we’ve gotta say, the blog — and the report — delve into a number of critically important topics for a wide range of energy-industry participants and investors.
Around the world, many governments, corporations and investors continue to press for an aggressively paced transition to low- and no-carbon sources of energy. But as important as it is to set goals — and provide sticks and carrots to help meet them — there’s no guarantee that the ambitious targets for renewables, energy conservation and the rest will be achieved. In fact, we’ve already seen evidence that “black swan” events like the Covid pandemic and Russia’s war on Ukraine can blow big holes in energy transition plans and that the realities associated with a massive, fast-paced shift to wind and solar power, electric vehicles (EVs) and renewable fuels can undermine those plans as well. Refiners and other energy industry players continue to navigate these uncertain waters. ESG-minded investors urge them to invest more in renewables. At the same time, the Biden administration presses them (for now) to ramp up refinery output. But it’s hard to justify investments in incremental refining capacity when energy transition goals suggest we’re approaching the day when demand for refined products peaks.
There’s good news for refiners and producers buried in all this — “The future’s so bright,” as we said in the title of today’s blog — namely that (1) climate policy and ESG pressure will constrain supply-side expansions (crude oil production and refining capacity) and (2) the slower-paced energy transition that we anticipate will maintain important roles — and healthy refinery margins — especially for diesel and jet fuel for decades to come, even as low- and no-carbon fuels come into more widespread use. We should emphasize that these constraints on supply-side expansions are a relatively new phenomenon. In the not-too-distant past (before ESG and the aggressive push for action on climate), shortfalls in refining capacity were typically responded to with expansions — or, more commonly, over-expansions — which, in turn, led to over-supply, lower margins and investment pullbacks.
Now, fears about over-investing in hydrocarbon commodities approaching their peak demand have severely reined in plans for refining growth. That reluctance to invest is certainly rational from a refiner’s perspective. After all, it can take five to 10 years to design, build and start-up a new refinery or a major refinery expansion and another 10-plus years to recover that investment — dauntingly long time frames in an era when many see demand for refined products plateauing and then declining. (More on our global demand expectations in a moment.)
The implication is that the combination of constrained growth in refinery capacity and higher-for-longer refined fuels demand will result in tight markets and higher margins. Nonetheless, there will be numerous bumps in the road. For example, significant new capacity is starting up this year and next, right as the global economy looks to be headed for a least a short-term slowdown. These trends will likely bring refining margins down considerably from current elevated levels in the short- to medium-term, with some regions suffering more than others. But a lack of new capacity start-ups after 2024 will pave the way for a more bullish long-term outlook.
So, where do we think this is all headed? In our new “Future of Fuels” report we detail and explain our forecasts for U.S. and global crude oil, refined products and biofuels supply and demand, and examine what the combo of constrained supply and higher-for-longer demand for diesel and jet in particular will mean for refiners’ margins and profitability. We also take a granular look at the new refineries, refinery expansions and refinery restarts being planned as well as the refineries being shut down or converted to renewable diesel (RD) production. And we consider a number of closely related matters, such as the likelihood that rebounding demand for refined products in China as that country re-opens will be met largely by increased Chinese refinery runs (which have been artificially limited the past couple years) and not by a surge in imports from the U.S. and other exporting nations. Also, we see U.S. production of RD and sustainable aviation fuel (SAF) increasing faster than domestic demand and, as a result, expect the U.S. to become a major exporter of both commodities later this decade.
More broadly, it’s clear that the U.S. will have to significantly grow its refined products export volumes as domestic demand stagnates and then declines. That should be doable thanks to the economic advantages that U.S. refiners continue to enjoy vis-à-vis their counterparts in Europe and developed parts of Asia — and thanks to the major challenges that Latin American and African countries have faced in building and operating refineries. U.S. refiners also stand to benefit from more refinery closures in Europe and developed Asia.
The most noteworthy forecasts in our report have an even broader scope — and, we acknowledge, they make us an outlier (though we believe our view is well-founded). As shown by the thick, dark-blue line in Figure 1, among this group of forecasters, we alone expect global demand for petroleum liquids (crude, NGLs and refined products) to continue rising into the early 2040s, from about 96 MMb/d today to ~108 MMb/d in 2030 and ~114 MMb/d 10 years after that. Our forecast for 2040 demand is ~9 MMb/d higher than the International Energy Agency’s (IEA) “Stated Policies” forecast (green line) and far above other forecasts by the IEA and BP that anticipate much faster transitions away from fossil fuels. It is important to note that we “normalized” demand among the forecasts to be equal in the 2022 base year, as there are some differences in actual reported data for that year.
Figure 1. Global Petroleum Liquids Demand Forecasts to 2040. Source: RBN-RFA
It’s not that we don’t see significant market penetration by EVs, renewables and other “greener” alternatives to hydrocarbons in the U.S., Europe, developed Asia and other parts of the world — we do. We also believe that petroleum liquids demand in Europe and Japan have already peaked, and believe that U.S. demand is leveling off and will start to see sustained declines after 2026. (Gasoline demand in the U.S. has already peaked.) In fact, most of the incremental global demand for refined products will be tied to transportation-fuel needs in developing economies, especially in places like Africa, India and other underdeveloped parts of Asia where petroleum-based refined products (diesel in particular) are likely to remain the only economically and technically feasible energy sources for many years to come. (Gasoline will be more impacted by the energy transition than other refined products and demand for it will peak globally by the mid-2030s since light-duty vehicles are easier to electrify than either heavy-duty vehicles or airplanes.)
The Lowdown on the U.S.
U.S. total liquids demand, as we said, is seen peaking three years from now (in 2026) at 21.2 MMb/d, or only ~400 Mb/d higher than the 2023 level. After that, climate and related ESG policies are seen reducing U.S. demand to 21 MMb/d in 2030, 20.5 MMb/d in 2035, 19.6 MMb/d in 2040 and 18.6 MMb/d in 2045. U.S. gasoline demand peaked at 9.3 MMb/d pre-Covid, and we forecast it staying flat at ~9-MMb/d through 2026 and then sliding to 8.6 MMb/d in 2030 and by another 800 Mb/d during each five-year period after that. Diesel demand will stay flat at 4.1-4.2 MMb/d through the two-decade forecast period and jet fuel demand will actually increase by half, from 1.6 MMb/d this year to 2.4 MMb/d in 2045.
With the vast majority of existing U.S. refining capacity expected to stay online for most of the forecast period — and with more penetration by biofuels — the U.S. will become increasingly long on refined products. The impacts will vary by region and product category and result in changing trade flows both between PADDs and with other countries and regions. For example, PADD 3’s (Gulf Coast) dependence on exports will grow as in-PADD demand falls and shipments of gasoline and diesel to the Mid-Continent fall over the long-term. (Some increase in shipments to the Mid-Con are expected through 2025.) PADDs 2 and 4 (Midwest/Great Plains and Rockies, respectively) will become long gasoline and diesel (on an annual average basis) by the early 2040s but will become increasingly short jet fuel. Growing pipeline flows from PADD 2 to PADD 1 (East Coast) via Energy Transfer’s PA Access pipeline and Buckeye Partners’ Laurel Pipeline reversal will help alleviate some of the Midwest’s glut. Finally, PADD 5 (West Coast) refiners will find it necessary to continue expanding diesel exports as RD increasingly replaces traditional diesel in the region due to state-level Low Carbon Fuel Standard (LCFS) programs in California, Oregon and Washington. These exports will flow primarily to the West Coast of Mexico and Central and South America. While PADD 5 is forecast to grow its requirement for jet fuel imports, the relative diesel/jet export/import balance will be impacted by policies associated with SAF incentives.
The Global Refining Picture
Energy transition forces will continue to play a major role in limiting investment in refining capacity in Latin America, Africa, and the developed world outside the U.S. Also, due to poorer economics and other factors, there are likely to be more shutdowns of existing refineries over the longer-term. This dynamic will be temporarily delayed, however, as a number of refinery projects are starting up over the next two years after having been deferred during Covid. The report discusses the timelines for commissioning refinery projects in the Middle East as well as projects in China, India, Mexico and Nigeria, plus their impact on international crude oil and refined products markets. Of particular note, our report raises concern about start-ups and sustained operations at both Pemex’s Dos Bocas refinery and Dangote’s refinery in Olokola (Nigeria).
More than 3 MMb/d of global refining capacity — mostly in the U.S., Europe and developed parts of Asia — has been permanently shut down since the start of 2019, many of the closures accelerated by Covid-related market effects. These facilities were primarily “non-core” plants that in any case would have likely been shuttered in the coming years as a result of ESG/energy transition and peak demand factors. Further closures are likely to occur, mostly in Europe and developed Asia, along with continued planned rationalization of capacity at small, independent refineries in China.
And a Lot More
There is, of course, much more happening on the supply and demand sides of the ledger in U.S. and global refined products and biofuel markets, and all the most salient topics are discussed in “Future of Fuels.” The report begins with an overview of the short- and long-term outlooks for the refining industry, then delves into a series of more specific topics, such as the advantages U.S. refineries have over many of their international counterparts; the growing significance of export markets; the ongoing impacts of the Russia-Ukraine war on Russian refineries and exports; the Chinese government’s strategy regarding the buildout of refining capacity and exports; the decline in heavy oil production in the Western Hemisphere and the resulting narrowing in heavy-vs.-light differentials; and the unique set of challenges that refiners in each PADD face.
Then the report provides a detailed look at U.S. and global refining capacity, including our assessment of where and when new capacity will come online (and be taken offline); the types of crude (heavy, medium, light) that capacity additions are designed to process; changes in regional product make capacity; and a detailed discussion of individual refinery project start-ups, restarts and shutdowns. Next, “Future of Fuels” shifts to global and regional demand trends for gasoline, diesel, jet, biodiesel, RD and SAF — including a section on the special dynamics driving the incentives-dependent biodiesel, RD and SAF markets; the margins for producing RD; and the availability of biofuel feedstocks. That’s followed up with U.S. and Canadian crude production forecasts, a look at Western Canadian crude takeaway capacity (a perennial concern), and a discussion of U.S. refined products pipeline projects. Then, penultimately, there’s the global price forecast section, in which we provide our forward-looking views (2023-42) on crude oil prices, heavy-vs.-light differentials, gasoline pricing, East Coast and West Coast gasoline price premiums over the Gulf Coast, middle distillate pricing, Chicago-vs.-Gulf Coast differentials, and pricing for RD feedstocks and RINs.
Finally, we know how important it is for those using our reports to have ready access to the data that supports our analysis and findings. The appendices in “Future of Fuels” include eight Excel workbooks with a total of about 70 spreadsheet tabs chock-full of information — and, of course, links to the Excel files behind that data so you can easily incorporate the data into your own analysis and planning. The spreadsheets include our outlook for supply, demand, capacity changes, prices and other important factors. We’re confident that our new report — which will be updated twice each year going forward — will become the industry’s go-to guide for what’s ahead for refineries and for refined products and biofuel markets. For more about the report, click here.
If you want to hear more, join RFA executives and Future of Fuels lead authors, John and Robert Auers, on Wednesday February 22nd 11-11:30 AM CT for a free 30-minute live webcast as they discuss key findings from the new report. We will cover some the challenges and opportunities the market will face in the coming years and wrap things up with a live Q&A session with the lead authors. Register here.
“The Future's So Bright, I Gotta Wear Shades” was written by Pat MacDonald and appears as the first song on side one of Timbuk 3’s debut studio album, Greetings from Timbuk 3. Released as a single in October 1986, it went to #19 on the Billboard Hot 100 Singles chart. The inspiration for the song came when Barbara K. MacDonald commented to her husband, singer/songwriter Pat MacDonald, “The future is looking so bright, we’ll have to wear sunglasses.” The song later became popular as a graduation theme song. Personnel on the record were: Pat MacDonald (lead, backing vocals, keyboards, guitars, bass, drums, percussion, harmonica, mandolin) and Barbara K. MacDonald (lead, backing vocals, keyboards, guitars, percussion, violin, mandolin).
Greetings from Timbuk 3 was recorded at Dustbowl Studios in Hollywood and Lone Star Studios in Austin during the summer of 1986. Produced by Dennis Herring, the album was released in October 1986 and went to #51 on the Billboard 200 Albums chart. One single was released from the LP.
Timbuk 3 was an American rock band formed in 1984 in Madison, WI, by the husband-and-wife team of Pat and Barbara K. MacDonald. They were later joined by drummer Wally Ingram and bassist Courtney Audain. They released seven studio albums, two live albums, one compilation album and six singles before breaking up in 1995. In 1987 the band was nominated for a Grammy Award for Best New Artist and in 1988 they appeared in the film D.O.A. starring Dennis Quaid and Meg Ryan.
Pat MacDonald has continued with a solo career, releasing 10 studio albums. He is also a member of the gothic-country duo, The Legendary Sons of Crack Daniels. He continues to record and tour. Barbara Kooyman (formerly Barbara K. MacDonald) is a solo artist who still records and tours. She has released four solo studio albums and is active as a community organizer in Austin, TX, where she resides.