Basking in high margins, downstream oil market must still prepare for looming changes

Refineries may now be enjoying high margins, but new oil-supply capacities coming online as well as accelerating globalization will pose new challenges ahead.

In a webcast entitled "Refining Drivers: Downstream Market Drivers to 2020," IHS experts say that despite the currently favorable playing field for refineries, heightened global competition for market share and other dynamics will exert increasing pressure on the industry, particularly on the less viable participants in the space.

The webcast is the 12th in a continuing series called "Oil: The Great Deflation" from IHS Energy, providing a series of timely insights and analysis on how the environment for lower-price oil is affecting various markets and industrial sectors.

On the whole, positive sentiment is running high for the moment in the refinery industry. Margins are extremely strong in the face of depressed feedstock crude prices, low operating costs, and improving product trade-especially with refiners able to find outlets eager to snap up excessive refinery production.

But a key trend worth heeding by the downstream industry is that future capacity will outstrip demand until at least 2020, said Stephen Jones, vice president for IHS Energy. Approximately 6.0 million barrels a day of crude capacity will come online within the next five years, and the resulting gush will put downward pressure on margins while also compelling capacity to be rationalized in the least competitive regions. Smaller European refineries, already faced with declining demand for refined oil product on the continent, could be particularly vulnerable, Jones added.

A second trend of note for the refinery industry is accelerating globalization. Given the increasingly competitive production of refined products, variability and uncertainty in demand growth will escalate globalization of the downstream sector, Jones remarked. As in the first observation, those hurt by the industry's growing globalization will be the smaller domestic refiners located in higher-cost markets that have not managed to expand their market throughout this time.

IHS sees a peak in oil demand emerging on the horizon but beyond the purview of the current window. Beyond 2030, distinct phases for the downstream market will become apparent, and convergent market forces will shape the industry's response in meeting future demand.

Among regional players, US refiners will run at high rates through the medium term, benefiting from low costs and export opportunities, said Sandeep Sayal, managing director at IHS Energy. US crude runs are expected to rise as 500,000 barrels a day of additional distillation capacity will come online in the next few years. Access among US refineries to pricing advantages, domestic crude stocks, and abundant natural gas supplies will keep costs down and runs elevated.

In Asia-Pacific, growth is also predicted in refinery runs, reflecting capacity additions in key demand growth centers. Runs will continue to rise in China, despite slowing demand growth in that country.

For Africa, refinery runs have been revised lower as prospects for new distillation capacity are limited. Even so, steady growth in product demand will mean that the continent is likely to become the world's largest product importer by 2030.

Higher import demand will also be the case with Latin America, while changing regional balances will likely result in Middle East refineries shifting some export volumes away from Asia toward the Atlantic basin.

While total liquid petroleum demand slowed overall to 600,000 barrels a day last year, conditions will improve and restore demand growth to more typical levels over the next two to five years, reaching 1.3-1.4 million barrels a day from 2017 to 2020, IHS forecasts.

In terms of downstream capital spend, announced refining projects through 2020 including conversion capacities now total $200 billion. Investments in conversion capacity are required for high-growth markets while rationalization takes place in mature markets.

At the same time, project deferrals or cancelations as well as cost deflation have reduced capex spend by approximately $35 billion. The majority of projects deferred or cancelled are in Latin America, but cost savings will benefit all projects.

IHS Staff Writer March 31, 2015

Learn more about IHS Oil Market and Downstream Suites.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.