Oil demand is recovering. This has been the most important message from analysts for the energy industry in the last few weeks. OPEC + is cutting production, and so are manufacturers in the US and Canada. Restoration of equilibrium in the oil market is on the horizon. However, there is a large segment of the industry for which the news is not so good - the downstream segment.
Typically, refiners make a profit in a very simple way: they buy crude oil, process it into fuel and plastic feedstocks, and sell them at a higher price. Cheap oil is generally the best scenario for refiners. That is, as long as there is a demand for their sophisticated products. This has not happened during the current crisis, and now refiners around the world are struggling to survive.
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According to recent reports from analysts, many of them did not make it. For example, a Wood Mackenzie report warned that those who survived would be the ones most suited to the fastest reality that their biggest business would be - turning oil into fuel - any money as demand falters Not earning
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In fact, optimistic expectations that improved oil demand will improve fuel demand have been crushed. Gasoline demand has actually picked up, but growth is weaker than expected. For jet fuel, this demand pickup is nonexistent. This has forced the refiner to shift its production to more gasoline and distilled fuel. However, this has provided a more disappointing refined margin to the additional supply of middle distillate, according to Bloomberg.
It is one of the most painful spots in the downstream industry and is perhaps the most obvious example of how coronaviruses can grow the entire industry. Jet fuel was a major component of the profit margins of the refiners, along with largely cheaper air travel. Coronavirus then brought the industry down. Airlines are hanging with a thread on bankruptcy, planes are on the ground, and jet fuel demand is in tatters. Meanwhile, the demand for diesel, such as gasoline, has not improved as rapidly as the industry has liked, so surplus supply is increasing.
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"The demand for gasoline is barely keeping some plants alive," said Stephen Wolff, head of Energy Aspects for Crude Oil. "And with jet production shifting to diesel and gasoline production, which puts even more pressure on product supply."
French Total CEO Patrick Payne called the refining margin "absolutely horrific" last month. And now Covid-19 is resurfacing in many parts of the world, fueling fears of a second series of lockdowns that will be the final blow for many refiners.
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The Chinese refiner — weathervane for fuel demand — has already started cutting processing rates, and this is a worrying sign. The main reason for the fall in sugar prices in April was the main driver behind the fall in oil prices, as it suggested a reduction in fuel demand and pick-up for crude oil. But it appears that nothing is certain in the state of the epidemic, and Wevertwein has moved towards inclement weather.
With the drop in demand, a problem with overcapacity has surfaced, the FT wrote earlier this month. According to UBS, the global refining capacity is 3 million BPD more than necessary, and if the downstream industry is to achieve its profitability, it needs to be cut by the end of next year. According to Wood Mac, some 1.4 million BPD in refinery capacity is in danger of closing between 2022 and 2023 in Europe alone.
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Older refineries are the weakest because they are less complex and less efficient than new ones. The new refineries are more versatile in their production and process crude at a lower cost. Older people will either need to shut down or shut down their game and with the lack of cash in the wider energy industry, this game may not be affordable to everyone.
A recent report by the company states that a large part of the refining industry is struggling with weak margins and will need to be optimized to ensure its survival. "Refining will need to go back to its roots as a conversion industry - and now needs to move beyond crude."
Beyond crude: For example biofuels and petrochemical recycling. Even normal petrochemical production will be a plus in the post-crisis world, even though many new projects in the petrochemical sector will be delayed due to a squeeze on cash.
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According to the International Energy Agency, global oil demand decreased by 16.4 million BPD in the second quarter. For the full year, the IEA has seen a drop in demand of 7.9 million BPD. This is 7.9 million BPD less oil that would need to be processed by global refiners into fuel and plastic feedstock. And, as ironically, the refiners are also facing a tame savage.
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