The near-term outlook for refining: Where to now?

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The past two years saw a series of unprecedented events disrupting demand and supply patterns and leading to an extremely tight global oil market in 2022. After a sharp collapse in oil demand due to the COVID-19 pandemic, a stronger-than-expected demand rebound came at a time when the refining industry was aggressively trimming its asset footprint. In addition, the invasion of Ukraine and subsequent sanctions on Russian crude and product exports added to global market tightness already under way and pushed crude and product prices to new highs by March 2022 (see sidebar, “Disclaimer on Ukraine”). These factors will continue to be the main drivers of market conditions in the next few years.

Drivers affecting refining margins in the near term

While there are many uncertainties that influence refining margins from both the supply and demand perspective, the four biggest drivers are the impact of Russian sanctions on global supply, Chinese policy toward refined product exports, the outlook for global-oil-demand growth, and the outlook for capacity growth from new refining projects.

Sanctions on Russian crude and product exports

Russian crude exports grew in 2022 by 0.7 MMbd, with a growing share being diverted to Asia.
Russian diesel export volumes to the Middle East, North Africa, and Turkey grew by the end of 2022.

Shifts in China’s product export policy: Squeezing supply

Perhaps the more unexpected driver of the recent supply tightness in oil markets has been a change in Chinese policy over refined product export quotas. In the second half of 2021, China began tightening the refined product export quotas it sets for its domestic refiners, cutting total 2021 quotas by 37 percent versus 2020.1 This is part of its longer-term policy to reduce “exported emissions” from running imported crude through typically more inefficient, marginal refining capacity.

The reduction in Chinese product exports has had a material impact on the market, adding to concerns of supply tightness. In late December, the government significantly backed off its product export restrictions, likely due to weaker than historical fuel demand and historically high diesel export margins.2 However, we anticipate lower exports in the future in line with the government’s long term policy stance, though sudden changes in policy in one period could pressure margins, albeit temporarily.

Near-term demand outlook

Global liquids demand could recover to 5 MMbd above 2019 levels by 2025, assuming a soft landing in the global economy.

Refining capacity growth

Refining capacity continues to grow by 2.9 MMbd through to 2025.

Market tightness and margins above historical average

US Gulf Coast refining margins could remain as much as $12/bbl above the historical average.

Implications for refiners

This market outlook should translate into significantly high cash flows in the near term. However, we expect refiners will continue to face long-term uncertainty due to the energy transition. In this higher and increasingly volatile margin environment, refiners will need to balance between capturing high margins from the current environment and using these cash flows to prepare for a more challenging long-term environment.

To capture the high upside potential in the near term, refiners could find opportunities to boost overall operational efficiency and utilization, including capital-expenditure investments that were previously uneconomic in lower margin conditions. Other areas of potential opportunity in the short term include improvements in turnaround planning, execution to minimize downtime, and tactical optimization including changing feed slate and product slate.

To strengthen their competitive positions on the refining supply curve in preparation for greater volatility in commodity prices and margins, refiners could also consider opportunities to reduce costs without compromising safety and reliability. These include the reduction of energy consumption costs through efficient cogeneration of steam and power, improving operating efficiency through process digitization, and leveraging predictive maintenance to reduce maintenance costs.

Various drivers will affect refining margins in the near term, but the greatest uncertainty is demand outlook and significant volatility. By focusing on the two levers mentioned above, players can use this as an opportunity to reposition to become more resilient in a potentially challenging long-term environment.

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