Does the IEA report spell gloom for refining firms?
The International Energy Agency (IEA) expects incremental demand for refined products to drop to 4.8 million barrels a day in the six years till 2023. Demand grew at a much higher pace (6.4 million barrels a day) in the previous six-year period between 2011 and 2017.
As the chart alongside shows, demand for liquid fuels is expected to grow at a faster pace.
This isn’t good news for refiners. “Over the next six years, they will continue losing market share to non-refined alternatives,” said the agency in its latest report Oil 2018.
Interestingly, electric vehicles don’t pose the chief risk. “Natural gas liquids fractionation products such as ethane, liquefied petroleum gases (LPG) and naphtha pose a bigger threat to the refiners’ market share than electric vehicles and gas-powered transportation combined,” notes IEA.
Cumulatively, refiners are expected to lose 110 basis points market share to 84.6% by 2023. One basis point is one-hundredth of a percentage point.
Further, IEA said it expects net refinery capacity additions of 7.7 million barrels a day between 2017 and 2023.
Clearly, the gap between refining capacity addition and incremental demand (4.8 million barrels a day) is quite large. Does it mean then that refining margins will be under tremendous pressure?
Not necessarily. Nitin Tiwari, analyst at Antique Stock Broking Ltd, says, “Planned capacity additions are mostly in excess of refined product demand projected. However, it’s worth noting that not all of planned capacity additions eventually fructify owing to delays, deferment and other factors.”
Refiners can manage their capacity utilization rates in a way that ensures reasonable profitability, he adds.
Even so, it’s worthwhile noting that in the previous six-year period between 2011 and 2017, capacity additions lagged growth in refined products’ demand.
As such, refining margins may well remain under pressure as they have been in recent months; although they may not collapse.
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