Since the 2008 financial crisis, global refinery throughput has increased by more than 3.0 mb/d, reflecting the improvement in world oil demand. This recovery in global oil consumption has been mainly due to growth in non-OECD countries, as OECD demand has declined by more than 4 mb/d from the peak seen in 2005. Non-OECD countries, particularly those in Asia, have expanded their refinery capacity, leading to a change in the   regional supply/demand balance and resulting in some Asian countries, such as India, becoming product exporters.
In line with contracting demand, refinery utilization rates in many OECD countries have dropped in recent years, mainly in Europe where refineries have suffered from poor economic performance due to weak margins in the Atlantic Basin. In 2011, OECD gasoline demand was particularly disappointing, dropping by 3% from the 5-year average to almost 14 mb/d, with US consumption falling to 8.4 mb/d in January, the lowest level in years. In addition to lower gasoline consumption, the supply side has been subjected to pressure from the substitution of non-refined products, mainly natural gas liquids (NGLs) and biofuels. At the same time, the other component of light distillates, naphtha, has been weak due to low demand in the petrochemical sector across the globe. Due to the poor performance of the gasoline market, refiners were encouraged to switch their refining modes in favour of middle distillates. Although demand for middle distillates experienced a temporary recovery in 4Q11, warmer weather and weaker consumption in the transportation sector led to a decline in OECD demand for middle distillates, thus preventing middle distillates from assuming their typical role as a market driver and leaving refining margins low during 4Q11 and 1Q12.
US refiners have seen better margins than in Europe, due to less expensive domestic crude and export opportunities to Latin America. This comparative economic advantage has allowed US refineries to hit a record-high utilization of 92% in July 2012, despite weak domestic demand. Furthermore, exports of diesel and gasoil have surged to a high of around 1.0 mb/d in 2Q12, reconfirming the country’s newfound status as a net exporter of refined products. Since the start of 2H12, margins have experienced a recovery worldwide on the back of relatively higher product demand, amid shutdowns, outages, and closures of some refineries in the Atlantic basin.
Due to the poor economic performance of the refining industry in recent years, the volume of announced capacity closures has accelerated since the end of last year, amounting to 3 mb/d of capacity by end-2012.
European refineries have been mainly affected, as well as some refineries on the US East Coast that have not been able to switch to cheaper crudes. Despite the significant volume of closures, these shutdowns are not likely to boost margins, as refining capacity globally is projected to increase by 1.3 mb/d and 1.7 mb/d in 2012 and 2013, respectively (see Graph 2). Most of this new capacity will be located in non-OECD countries, particularly Asia and the Middle East. Under-utilized capacity will therefore remain high, estimated at around 3.5 mb/d in 2012 and 4.0 mb/d in 2013, keeping margins under pressure in the coming year.
Moreover, the refining industry will have to cope with this capacity under-utilization in an environment of a weak downstream OECD market, as the overall declining trend in demand in many OECD countries is expected to continue. Due to the expected slowdown in the world economy, the global demand growth forecast for 2013 remains at around 0.9 mb/d, almost at the same level as in the current year. This is likely to keep refining margins under pressure due to the expected worsening imbalance between gasoil/gasoline along with the high levels of idle refining capacity. In addition, volumes of non-refined products will continue to grow, limiting the need for light distillates from refineries and potentially leading to even more refinery sales and closures.
Returning to the current year, OECD crude oil stocks remain at comfortable levels, especially in the US market. As a result, any product shortage could be readily met by higher utilization of idle refinery capacity in a market with abundant crude supplies.
Source: OPEC