Page 8 - DMEA Week 04 2020

DMEA COMMENTARY DMEA
Refiners face rocky 2020 start
Wood Mackenzie cites geopolitical uncertainty, IMO restrictions and slowing US oil growth
GLOBAL
REFINERS have got off to a bad start this year, with factors such as heightened geopolitical risks, stricter IMO regulations coming into force and slowing US tight oil growth weighing down on margins, Wood Mackenzie wrote in a research note last week. Crack spreads were weak in the months leading to the end of last year, with some operators in Europe and Asia registering margins below historical five-year lows, the Edinburgh-based consultancy stated.
“US refiners were in a better place. Bu this was not how it was meant to be, as the expectation was that margins would rise as 2020 approached,” WoodMac’s vice president for refining and chemicals, Alan Gelder, commented.
Last year was difficult because of weak growth in oil product demand, especially in the second quarter. But the run-up to the IMO’s introduc- tion of tougher limits on the sulphur content of fuel oil also played a key role, WoodMac said.
Shipowners adapted to the restrictions either by switching to lower-sulphur fuel oil (LSFO) or marine gasoil or investing in scrubbers to remove sulphur oxides from exhaust fumes. But the main financial burden fell on refiners, who had to splash out on new facilities and equip- ment to produce compliant fuel.
High sulphur fuel oil (HSFO) prices collapsed rapidly in October and November as the IMO deadline neared, according to WoodMac, as shipowners stopped buying it. But there was no comparable growth in LSFO prices for refiners to benefit from, and so their margins weakened.
“The fuels being purchased were LSFO com- ponents from stocks built up during 2019, so while HSLO prices collapsed, there was no cor- responding rise in the price of marine gasoil and other clean products, as there was no change in demand for them,” Gelder explained.
“In fact, distillate prices were depressed due to concerns about the US-China trade war and global economic growth remaining weak,” he continued. “The collapse of fuel oil prices with no corresponding change in the price of clean products had a strong effect on crude differen- tials, as the heavy/sour crudes were significantly less valuable to refiners.”
Refiners operating with more basic facilities were hardest hit, as the widening in crude differ- entials has lagged the change in product values, WoodMac said.
Further complicating the situation was OPEC’s pledge to further restrict supplies to rebalance global supply with demand. The car- tel’s actions drove up the price of medium/sour crudes typically produced in OPEC countries. This was particularly bad news for Asian refin- ers, who rely heavily on these crude supplies.
According to Gelder, the US is likely to play a pivotal role in the major changes in 2020, sup- porting stronger global economic growth and higher oil demand.
“US tight oil supply growth was a key feature of 2019, with growth of over 1mn barrels per day,” the expert said. “However, that growth will not con- tinue into 2020 as rig counts decline and low cap- ital budgets take their toll on the US E&P sector.”
“The key sector for US supply growth for 2020 is NGLs, with even greater US LPG exports anticipated. The scale and import position of the US gasoline market means it is key to Atlantic Basin refining margins,” he continued. “Sus- tained fuel efficiency improvements and electric vehicle penetration are often cited as reasons for the decline in US gasoline demand. 2020 may well be the year in which the decline becomes evident, but it will be small, at less than 0.5%, and may be difficult to notice given seasonality and month-on-month volatility.”
Gelder noted three key forecasts regarding IMO implementation that appeared robust. Firstly, complaint low-sulphur fuels will be costly and therefore sell at a premium to crude oil such as Brent. Secondly, the installation of scrubbers on board ships will be considered economically attractive because of the wide pricing spread between IMO-compliant fuels and HSFO. Thirdly, there will be a change in crude differ- entials, with very-low sulphur crudes fetching a large premium to sourer blends.
“Critical uncertainties remain, as full global [IMO] compliance is not expected,” Gelder cautioned. “The legislative framework is far from watertight. And some countries, such as South Africa, are yet to enshrine the IMO reg- ulations into their national legislation. Others, however, have legislated significant fines for non-compliance.”
The expectation of stronger refining mar- gins this year assumes that there will be a lack of LSFO, and this looks increasingly likely, he said. Low availability is being reported, as well as a rise in demand for middle distillates.
“We will find out in the coming weeks as to how much more marine gas oil is required by the shipping sector and this will determine how much better refining margins are in 2020,” Gelder explained. “The outlook will, however, be masked by high volatility. The switch in the bun- ker fuel quality is a key driver, but there are oth- ers. Even though there has been no change yet in the underlying crude oil fundamentals, Middle East tensions have increased the risk premium on crude oil, which will weaken refining mar- gins as it will take time for any cost increase to be passed on to consumers.” ™
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w w w. N E W S B A S E . c o m Week 04 30•January•2020