Page 6 - DMEA Week 10 2020

DMEA COMMENTARY DMEA
Tough outlook for refiners despite low oil prices
Low oil prices offer some despite, but the outlook is grim as COVID-19 saps fuel demand and new capacity is brought on stream
GLOBAL
WHAT:
Low oil prices have improved refining margins.
WHY:
Russia and Saudi Arabia have initiated a supply war.
WHAT NEXT:
Oil demand is set to fall this year because of COVID-19’s impact, and new capacity will come on stream, weakening margins.
REFINERS enjoyed higher margins following the collapse in oil prices on March 9, triggered by Saudi Arabia’s decision to ramp up production after the breakdown of OPEC+ talks.
Depending on how committed the kingdom and Russia are to engaging in a drawn-out sup- ply war, oil could remain at $30-35 per barrel for months, if not more than a year. While refiners can enjoy some temporary despite, cheap oil will not be able to protect the sector from the impact of COVID-19, new supply and a bearish long- term outlook for motor fuels.
Italy, the worst affected in Europe by what the World Health Organisation (WHO) now describes as a pandemic, has imposed a lock- down, grounding all flights. Other nations with significant numbers of confirmed cases such as France and Spain could take similar steps. Meanwhile, US President Donald Trump has announced sweeping travel restrictions on 25 European countries in a bid to combat the spread of the disease. An increasing number of govern- ments are also banning public events, shutting down schools and advising people against trav- elling to work. All this bodes ill for fuel demand.
Low oil prices usually stoke demand, but any positive effect will be offset by COVID-19. Oslo- based Rystad Energy said in a research note on March 12 it predicted global oil demand to fall by 600,000 barrels per day (bpd) to 99.2mn bpd in 2020, because of the virus.
Road fuel demand will remain largely flat, rising from 49.7mn to 49.8mn bpd, Rystad said, which previously projecyed a growth to 50.3mn bpd. Jet fuel is slated to fall 11% to 6.6mn bpd, owing to a 13% reduction in the number of flights.
At the same time, operators will face increas- ing competition from new capacity coming on stream, driving down fuel prices.
“Refiners will get temporary relief from the cheap crude, but any sustained increase in runs will see a worsening oversupply situation in the products markets beyond 2Q after peak turna- round season,” Energy Aspects analyst Sandra Octavia told Bloomberg this week.
The longer-term picture is also grim. In its market report on March 9, the International Energy Agency (IEA) predicted that demand for refined products would increase by around
4.4mn bpd between 2020 and 2025, but that refiners would add 6.2mn bpd of extra capacity in that period. Beyond the impact of the virus, increased engine efficiency and a rise in the number of electric vehicles (EVs) will weigh down on demand, the IEA said.
The fuel that will see the weakest growth over the next five years will be gasoline, at just 90,000 bpd on average per year, according to the agency. By the end of the period growth the fig- ure will have fallen to just 50,000 bpd. Demand will decline in the US, the world’s largest gasoline market, as well as in many other OECD coun- tries. Diesel will not fare much better, growing by 110,000 bpd per year in 2020-2025.
Despite being worst affected by COVID-19, demand for kerosene and jet fuel will expand comparatively much faster over the next five years, by 90,000 bpd but from a much lower base level.
The IEA sees demand for low-sulphur fuel oil at 1.3mn bpd in 2020, rising to 2.1mn bpd in 2025, while demand for high-sulphur fuel oil will crash by 60% this year as a result of IMO envi- ronmental restrictions coming into force. It will then stabilise.
Consumption of marine gasoline will climb 490,000 bpd in 2020 but will then decline by 70,000 bpd on average between 2021 and 2024, as it cedes market share to low-sulphur fuel oil.
Demand for naphtha, LPG and ethane will account for half of oil demand growth in the five years, highlighting the expanding role pet- rochemicals are playing in soaking up crude supply. A large part of the extra petrochemical supply arriving in the period will come from China, which is predicted to add 1.8mn bpd of capacity by 2025. The IEA noted that the abun- dance of light-sweet crude grades was reducing the need for refinery upgrades.
“[This] fits into the picture of both supply and demand developments,” it said, pointing to lack- lustre demand growth for gasoline and middle distillates.
“The premier transport fuels that support refinery margins are most susceptible to replace- ment by alternative fuels and technologies such as electric vehicles, compressed natural gas [CNG] vehicles and LNG-fuelled trucks,” it said.™
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w w w . N E W S B A S E . c o m Week 10 13•March•2020