Refining capacity rise to exceed demand: McKinseyby Martin Menachery on Dec 8, 2016
According to forecasts from McKinsey Energy Insights (MEI), until 2020, global refining will move towards lower utilization and margins as capacity growth exceeds demand, and with higher demand for distillates due to marine pollution (Marpol) regulations, post-2020 market conditions are expected to improve.
The latest Global Downstream Outlook from MEI notes the last two years have seen major shifts as a result of falling crude price, a subsequent rise in global product demand and the fuel / oil balance. These factors, along with recent developments like the diesel vehicle emissions scandal and the International Maritime Organization’s cap on sulphur in bunker fuel by 2020, have led to an uncertain outlook for the global refining market.
McKinsey Energy Insights modelled a high and low growth demand case, with the high case in tune with the latest industry consensus. In the high case, the light product demand is growing at 1.2% annually through to 2020. While it is predicted that diesel will provide the biggest demand growth post-2020, Asia will remain the leading consumer of light products. This is, however, dependent on vehicle improvements, fuel substitutions and diesel emission regulations.
Commenting on the observations in the MEI forecasts, Cherry Ding, Senior Analyst, MEI, said: “In the near term, global refining capacity is expected to grow faster than light product demand, which will contribute to a rising oversupply of capacity and will result in lower utilization and margins for refiners.”
“A huge factor in both of these demand growth cases is the industry’s response to the upcoming global sulphur cap in marine bunker fuel. While we expect the payback for installing scrubbers in new vessels to be quite attractive, we anticipate there will be some non-economic barriers to new installations and retrofits in the first few years post-Marpol. The rate of installations and retrofits, as well as uncertainty around refiners’ response in terms of new bottom of the barrel investments, will all have a big impact on the global resid markets and refining margins,” added Cherry.
The North American crude markets, according to the outlook, are likely to remain tight until 2020, when a resurgence of the unconventional crude supply could push the market back to export net-back pricing conditions.
The MEI research is based on results from McKinsey’s Global Downstream Model, a macro-based global supply and demand balances and flows tool, and OilDesk, a scenarios-based price-forecasting tool.