Crude distillation capacity fell by 3.8 million barrels per day in the last two years — the first drop for two decades — exacerbating tight markets and price volatility, according to a new joint report by Riyadh-based International Energy Forum (IEF) and S&P Global.
The Oil Refining Industry Insights report shows that global fuel markets are expected to stay tight for years as new capacity takes time to ramp-up and investments are muted by demand outlooks that show global petroleum demand plateauing.
“I am concerned that investors are holding back from new refinery investments based on decarbonisation forecasts that may not be borne out in reality,” said IEF Secretary General Joseph McMonigle.
Balancing act
In both the short-term and medium-term, the balance for global fuel markets will be fragile, which creates the need to maintain robust inventories and contingency plans to deal with supply disruptions, according to the report.
“The global refining industry is stretched, so unexpected disruptions have a disproportionate effect on prices. Governments urgently need to review their contingency plans to ensure they can cope with the inevitable and I believe more investment will be needed,” McMonigle said.
A record 3.8 MMbbl/d of crude distillation capacity shut down between 2020 and mid-2022 as the pandemic weakened margins, accelerated refinery closures, and encouraged the conversion of refineries to biofuels or distribution terminals, the report finds.
Refining margins ballooned earlier this year to a record $35-50 per barrel versus a more normal $10 a barrel. The report finds that Russia and China both have available refining capacity, but sanctions limit Russia’s exports and domestic policies limit China’s.
Sanctions and embargos have displaced nearly 3 mb/d of Russian products that are not easily rerouted, and Chinese exports are down 30% from 2019 levels as the government has prioritized domestic markets.
More than 2 mbpd in new refining capacity is scheduled to come online by the end of next year, but history shows delays and operational challenges are to be expected.
Looking to the medium-term outlook, the report finds significant uncertainty over future demand for conventional refining capacity. Despite high margins, investors are reluctant to commit to new projects because the transition to electric vehicles could make them stranded assets.
