It could be argued that no sector in the energy industry has seen more uncertainty the past three years than refining. In rapid succession, it experienced a historic collapse in demand, a shaky recovery, a run-up in crude oil and other feedstock prices, the disruption in Russian supply, and the wrath of the public and politicians alike when gasoline and diesel prices rocketed higher earlier this year. Prices at the pump may have sagged in recent months, but don’t think for a second that refining has reverted to anything resembling stability and normalcy — refiners still face a host of challenges and unknowns. For starters, what’s ahead for crack spreads, which have been spiking up and down lately? How quickly will electric vehicles (EVs) undermine demand for traditional motor fuels? And what about renewable diesel? New environmental regulations? More refinery closures? In today’s RBN blog, we look at the long list of challenges domestic and international refiners will face through the rest of the 2020s.
The key events of the 2020-22 period — the pandemic, a land war in Europe, and now, the threat of an economic downturn — shook or even undid a lot of energy-market expectations. Three years ago this month, before all hell broke loose, a major concern among many refiners was the impending implementation of IMO 2020, which threatened to throw the middle distillates market seriously out of kilter and result in major changes to crude differentials. (Neither of these happened in 2020, but are being felt now.) There were also growing worries about an impending transition to EVs and an allegedly looming “peak” in petroleum demand. COVID soon made 2019’s concerns seem quaint. Rather than simply having to deal with a shift toward lower-sulfur bunker in the global shipping industry or a slowdown in motor-fuel demand growth, U.S. refiners in March 2020 suddenly faced the steepest decline in gasoline, diesel and jet fuel demand ever (see Strange Brew). In response, refiners did all they could to ramp down their operations — some went offline entirely (see Baby Break It Down) and others shifted to renewable diesel, which had emerged as an economically viable alternative (see Where Are You Going?).
Even bigger changes were happening just beneath the surface — not just in the U.S. but internationally. In most places, demand for refined products eventually recovered to pre-pandemic levels, but three years of growth had been lost. A handful of new refineries came online (mostly in the Middle East and Asia), enabling global refining capacity to inch up by 315 Mb/d in the 2019-22 period (green arrow at center-top in Figure 1), but refining capacity in the Americas fell by 1.2 MMb/d (most of that decline coming in the U.S. — red arrows to left) and Europe’s capacity declined by 900 Mb/d. As RBN’s Refined Fuels Analytics practice sees it, another 2+ MMb/d of refining capacity is under threat worldwide, raising all kinds of questions about the sector’s ability to keep pace with (still) rising demand.
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