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Oil Refining Capacity Set To Surge, But Can It Boost Oil Prices?

Refinery

A fresh wave of seasonal oil demand is expected to be unleashed when the global refining capacity increases to 101.8 million barrels per day (mb/d) in August, compared to 97.25 mb/d in March, according to data on Thomson Reuters Eikon.

Though the current rally in oil is primarily due to supply outages, the seasonal demand may also increase oil prices.

The expected demand increase of 4.55 mb/d in a matter of six months comes at a time when production is dropping, causing the refineries to compete with each other to grab a portion of the available oil production, which is likely to limit the slide in oil.

Various reports forecast that the global crude refining capacity will witness strong growth in the next five years. China, Southeast Asia, Latin America and the Middle East will lead the refinery growth.
The most conservative report predicts a 9.4 mb/d addition in global capacity by 2020, whereas the most aggressive report expects an addition of 25 to 28 mb/d in the next five years.

However, in the near-term, the Chinese and the Indian refining capacities are increasing. Both nations have increased imports to shore up their strategic oil reserves when oil prices are still below the $50 per barrel mark. In the first quarter of 2016, 50 percent of the global oil demand growth was from China and India.

Though global demand is projected to increase both in 2016 and 2017, the refining capacity is increasing at a faster pace. New refineries are being added to cater to the local demand, which is expected to increase the supply glut of refined gasoline, diesel, jet, and shipping fuel. Related: U.K. Loses 120,000 Oil Jobs In Oil Bust 

Producers of heavy crude grades see refining as an opportunity to increase their profitability by exporting refined products. The new refineries are concentrating on integrating petrochemicals, aromatics and lubricants. This diverse mix offers the companies new marketing products, which are economically beneficial, though the refiners earn lower refining margins due to the global glut. Refineries also add a sense of energy security to these nations.

Currently, the reserve capacity, a difference between available and installed capacity, is tightening and is expected to fall below 500,000 barrels per day, hence, the refiners will have to cut production to match the existing demand, thereby reducing oil demand and pushing prices lower.

"Until new refineries are built, refining activity and, by extension refinery crude demand can basically only go down as facilities either go into unplanned outage or refinery runs are cut to reduce an emerging product glut," said a senior oil trader in Singapore, reports Reuters.

However, due to the various supply outages, about 2.5 mb/d of crude oil production is affected. Hence, the global production has dropped below 95 mb/d, turning the supply glut into a deficit. Refiners are likely to bid prices higher to fulfill their requirement of crude oil, which will limit any downside in crude. Related: L.A. Fights To Become Greenest City In The U.S.

On the other hand, if demand drops and supply is restored, the balance will again shift. The oil markets are watching closely to see if the slowdown in the Chinese growth leads to a drop in Chinese demand.

The last two weeks of Baker Hughes rig count data has shown an increase in the U.S. rig count. Though the increase is nominal, it signals the intentions of U.S. shale oil to return as prices continue to increase.

The next few weeks will be critical for oil prices and will cause a tilt away from the balance, either on the upside or on the downside.

By Rakesh Upadhyay for Oilprice.com

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