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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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The Crisis Isn't Over For Oil Refiners

Refiners and integrated oil firms continue to struggle with low refining margins, as a part of global oil demand—jet fuel consumption—is still enormously depressed by international travel restrictions. 

Margins for middle distillates, which include jet fuel, have improved since the worst effect of the pandemic last year. But the crisis in the airline industry and the pressure on refiners to curb jet fuel supply amid still very low demand could accelerate permanent closures of refineries geared to produce more middle distillates than gasoline, especially in Europe and Asia. 

New refinery capacity in the Middle East and Asia also pressures older refineries, which yield more middle distillates, into risking permanent closures due to unprofitable or uncompetitive low-profit-margin operations. A current glut of diesel supply in Asia also depresses margins, while crude oil prices above $65 a barrel make raw materials more expensive. 

The COVID-19 shock to oil demand has already resulted in idled capacity and permanent closures of refineries worldwide, including in the United States. Even with closures of 1.7 million bpd capacity announced by November 2020, “there remains significant structural overcapacity,” the International Energy Agency (IEA) said at the end of last year. 

More refinery closures are in the cards, analysts say, given the newly built capacity and the loss of jet fuel demand which is not expected to recover to pre-COVID levels until 2023. 

Sure, refining margins have increased in recent months compared to the worst from the spring of 2020, as Reuters market analyst John Kemp says

Related Video: Goldman Calls $70 Oil in Q2, But Jet Fuel Is The Joker

“Good to see refining margins improve here in January a little bit, strengthening a little bit, which is good, but still a long ways off what historical numbers would be,” BP’s chief executive Bernard Looney said on the Q4 earnings call last month.

Yet, the current crisis is an existential threat to smaller and less efficient refineries in Europe and Asia that were struggling to turn profits even before the pandemic. 

Even oil majors acknowledge that some sites have become permanently uneconomical amid depressed refining margins, fierce regional competition, and expectations of declining road fuel demand in the long term. 

For example, ExxonMobil and BP announced in the span of just a few months closures of their respective refineries in Australia. They now plan to convert them into fuel import terminals.  

Due to its geographical position, Australia has lost the competition in the refining business as small and old refineries cannot rival the booming oil processing capacity in Asia, particularly China and India.   

Globally, refining faces a tough—and potentially long—way to recovery, said Wood Mackenzie’s Vice President Oils Research, Ann-Louise Hittle, and Alan Gelder, Vice President Refining, Chemicals & Oil Markets. 

“Refinery closures or restructuring were a key feature of 2020 across Europe, Asia and the Americas, but did little to lift margins in the face of the collapse in demand,” they wrote in January. WoodMac’s experts see refinery utilization levels globally staying low this year, “so the threat of refinery rationalisation remains.” 

This year, more than 1 million bpd of refining capacity is expected to be completed in the Middle East and Asia, and these newly-built sites might prompt further rationalization in Europe and across Asia, according to WoodMac.

In Europe, 1.4 million bpd of refining capacity is under serious threat of closure by 2023 at the latest, according to a Wood Mackenzie analysis from the middle of last year. 

From Europe to Asia and the Americas, smaller and older refineries could fall victims to the structural overcapacity exacerbated by the COVID crisis. Newer and larger refineries integrated with petrochemicals could pose too overwhelming competition for smaller sites in the post-pandemic oil demand patterns.  

By Tsvetana Paraskova for Oilprice.com

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