Oil Price Crash Forces Refiners To Consolidate Or
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Posted On: 07/15/2020 7:22:02 AM
Oil Price Crash Forces Refiners To Consolidate Or Die
By Irina Slav - Jul 14, 2020
Oil demand is recovering. This has been the most important message from analysts for the energy industry over the past couple of weeks. OPEC+ is cutting production, and so are producers in the U.S. and Canada. The restoration of balance in the oil market is on the horizon. There is, however, one large segment of the industry for which the news is not so good – the downstream segment.
Typically, refiners profit in a very simple way: they buy crude oil, process it into fuels and plastics feedstocks, and sell these for a higher price. Cheap oil is normally the best scenario for refiners. That is, as long as there is a demand for their refined products. This has not been the case during the current crisis, and now refiners around the world are struggling to survive.
Many of them won’t make it, according to recent reports from analysts. A Wood Mackenzie report, for instance, warned that those that survive will be the ones that adapt the fastest to the harsh reality that their biggest business--converting oil into fuels--is not making any money as demand falters.
Indeed, optimistic expectations that an improvement in oil demand would translate into an improvement in fuel demand have been crushed. Gasoline demand has picked up, indeed, but growth is weaker than hoped for. For jet fuel, this demand pickup has been nonexistent. This has forced refiners to shift their production to more gasoline and distillate fuels. This, however, has led to excess supply of middle distillates, further depressing refining margins, according to Bloomberg.
This is one of the most painful spots in the downstream industry and perhaps the most obvious example of how the coronavirus can upend a whole industry. Jet fuel was a major component of refiners’ profit margins with mass affordable air travel. Then the coronavirus struck this industry down. Airlines are hanging by a thread over bankruptcy, aircraft are grounded, and demand for jet fuel is in tatters. Meanwhile, demand for diesel, like demand for gasoline, has not been improving as fast as the industry would have liked, so the surplus supply has been building up.
Related: Saudi Arabia Has No Plans To Increase Oil Exports Just Yet
“Right now gasoline demand is barely keeping some plants alive,” Stephen Wolfe, Energy Aspects’ head of crude oil told Bloomberg earlier this month. “And with jet production shifting over to diesel and gasoline production, that puts even more strain on product supply.”
French Total’s CEO, Patrick Pouyanne, called refining margins “absolutely catastrophic” last month. And now there is a resurgence of Covid-19 in many parts of the world, fueling fears of a second series of lockdowns that will be the final blow for many refiners.
Chinese refiners—the weathervane for fuel demand—have started cutting processing rates already, and this is a worrying sign. The rebound in Chinese run rates in April was one of the main drivers behind the recovery in oil prices, as it suggested a pickup in demand for fuels and hence for crude oil. But it appears nothing is certain in a pandemic situation, and the weathervane has swung to bad weather.
With demand depressed, a problem with overcapacity has emerged, the FT wrote earlier this month. According to UBS, global refining capacity is 3 million bpd higher than necessary, and if the downstream industry is to regain its profitability, this needs to be cut by the end of next year. According to Wood Mac, some 1.4 million bpd in refinery capacity is under threat of closure between 2022 and 2023 in Europe alone.
Older refineries are the most vulnerable as they are less complex and less efficient than new ones. New refineries are more versatile in their output and process crude at lower costs. The old ones would need to either up their game or shut down, and with a shortage of cash across the wider energy industry, upping the game may not be affordable for everyone.
“Large parts of the refining industry will be suffering from weak margins and will need to adapt to ensure their survival,” Wood Mac’s vice president for refining chemicals, and oil markets said in the company’s recent report. “Refining will need to go back to its roots as a conversion industry – and that now needs to extend beyond crude oil.”
What is beyond oil? Biofuels and petrochemicals recycling, for example. Even regular petrochemicals production will be a plus in the post-crisis world, even though many new projects in the petrochemical field will likely be delayed because of the squeeze on cash.
Global oil demand fell by 16.4 million bpd in the second quarter, according to the International Energy Agency. For the full year, the IEA sees the demand decline 7.9 million bpd. This is 7.9 million bpd less oil that would need to be processed into fuels and plastics feedstock by global refiners. And, as ironic as it may be, refiners are also facing a tighter crude oil market, according to the IEA, meaning higher prices for crude and thinner margins still. This is not a good time for the downstream industry.
By Irina Slav for Oilprice.com
https://oilprice.com/Energy/Energy-General/Oi...r-Die.html
By Irina Slav - Jul 14, 2020
Oil demand is recovering. This has been the most important message from analysts for the energy industry over the past couple of weeks. OPEC+ is cutting production, and so are producers in the U.S. and Canada. The restoration of balance in the oil market is on the horizon. There is, however, one large segment of the industry for which the news is not so good – the downstream segment.
Typically, refiners profit in a very simple way: they buy crude oil, process it into fuels and plastics feedstocks, and sell these for a higher price. Cheap oil is normally the best scenario for refiners. That is, as long as there is a demand for their refined products. This has not been the case during the current crisis, and now refiners around the world are struggling to survive.
Many of them won’t make it, according to recent reports from analysts. A Wood Mackenzie report, for instance, warned that those that survive will be the ones that adapt the fastest to the harsh reality that their biggest business--converting oil into fuels--is not making any money as demand falters.
Indeed, optimistic expectations that an improvement in oil demand would translate into an improvement in fuel demand have been crushed. Gasoline demand has picked up, indeed, but growth is weaker than hoped for. For jet fuel, this demand pickup has been nonexistent. This has forced refiners to shift their production to more gasoline and distillate fuels. This, however, has led to excess supply of middle distillates, further depressing refining margins, according to Bloomberg.
This is one of the most painful spots in the downstream industry and perhaps the most obvious example of how the coronavirus can upend a whole industry. Jet fuel was a major component of refiners’ profit margins with mass affordable air travel. Then the coronavirus struck this industry down. Airlines are hanging by a thread over bankruptcy, aircraft are grounded, and demand for jet fuel is in tatters. Meanwhile, demand for diesel, like demand for gasoline, has not been improving as fast as the industry would have liked, so the surplus supply has been building up.
Related: Saudi Arabia Has No Plans To Increase Oil Exports Just Yet
“Right now gasoline demand is barely keeping some plants alive,” Stephen Wolfe, Energy Aspects’ head of crude oil told Bloomberg earlier this month. “And with jet production shifting over to diesel and gasoline production, that puts even more strain on product supply.”
French Total’s CEO, Patrick Pouyanne, called refining margins “absolutely catastrophic” last month. And now there is a resurgence of Covid-19 in many parts of the world, fueling fears of a second series of lockdowns that will be the final blow for many refiners.
Chinese refiners—the weathervane for fuel demand—have started cutting processing rates already, and this is a worrying sign. The rebound in Chinese run rates in April was one of the main drivers behind the recovery in oil prices, as it suggested a pickup in demand for fuels and hence for crude oil. But it appears nothing is certain in a pandemic situation, and the weathervane has swung to bad weather.
With demand depressed, a problem with overcapacity has emerged, the FT wrote earlier this month. According to UBS, global refining capacity is 3 million bpd higher than necessary, and if the downstream industry is to regain its profitability, this needs to be cut by the end of next year. According to Wood Mac, some 1.4 million bpd in refinery capacity is under threat of closure between 2022 and 2023 in Europe alone.
Older refineries are the most vulnerable as they are less complex and less efficient than new ones. New refineries are more versatile in their output and process crude at lower costs. The old ones would need to either up their game or shut down, and with a shortage of cash across the wider energy industry, upping the game may not be affordable for everyone.
“Large parts of the refining industry will be suffering from weak margins and will need to adapt to ensure their survival,” Wood Mac’s vice president for refining chemicals, and oil markets said in the company’s recent report. “Refining will need to go back to its roots as a conversion industry – and that now needs to extend beyond crude oil.”
What is beyond oil? Biofuels and petrochemicals recycling, for example. Even regular petrochemicals production will be a plus in the post-crisis world, even though many new projects in the petrochemical field will likely be delayed because of the squeeze on cash.
Global oil demand fell by 16.4 million bpd in the second quarter, according to the International Energy Agency. For the full year, the IEA sees the demand decline 7.9 million bpd. This is 7.9 million bpd less oil that would need to be processed into fuels and plastics feedstock by global refiners. And, as ironic as it may be, refiners are also facing a tighter crude oil market, according to the IEA, meaning higher prices for crude and thinner margins still. This is not a good time for the downstream industry.
By Irina Slav for Oilprice.com
https://oilprice.com/Energy/Energy-General/Oi...r-Die.html
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