Global oil demand is expected to rebound from the lowest in COVID-19 lockdowns in 2021, but the expected surge in Middle East crudes and robust growth in biofuels has implications for global crude and refiners.
In order to fuel the expected economic recovery while continuing to reduce the heaviest global inventories next year, OPEC + appears poised to gradually ease its production brakes while keeping a watchful eye on the impact of the deployment of COVID-19 vaccines on demand. .
Global liquids supplies are forecast to increase by an average of 3.5 million bpd in 2021, according to S&P Global Platts Analytics, with almost all of the total coming from crudes pumped by the Saudi-led and Saudi-led OPEC + group. Russia.
Although dependent on a difficult-to-predict OPEC + production policy, around 70% of the growth in crude supply could come from the Middle East next year, Saudi Arabia and other major producers in the world. OPEC adding 800,000 bpd to the market, estimates Platts Analytics. In contrast, outside of OPEC, US production is expected to decline by an additional 1 million bpd on average in 2021, as reductions in pandemic drilling translate into higher rates of decline.
In addition to potential greater volatility of supply due to disruptions in the Middle East, a growing reliance on Middle Eastern crudes has implications for the average quality of global crude.
The rebound in OPEC supply means the tables will be turned on years of rapid growth from light unsulphurized crude from the US shale to the medium sour crudes that predominate in the Middle East. After declining by a cumulative 5.4 million bpd from 2017 to 2020, the global supply of medium sour crudes is expected to rebound by more than 1.4 million bpd next year, according to Platts Analytics.
“Overall, liquids growth next year will be dominated by OPEC crude,” said Shin Kim, head of supply and production at Platts Analytics. “Light unsweetened crude is barely growing at all in 2021 … but watch out for this acidic medium which will play a dominant role in growth for 2021.”
The shifting slate of the crude could help refiners who have paid higher prices for heavier sour crudes, which are the mainstay of their base grades.
More Middle Eastern crude could weaken sour crude prices and broaden their soft crude discounts, which recently narrowed thanks to a buying spree in China.
Biofuels, growth of NGLs
A return to wider spreads for heavier sour crudes, however, will not be enough to reverse the plight of the long-suffering Western refiners who have seen fuel demand sapped by the pandemic and are facing an acceleration of alternative fuels. and a weaker outlook for oil demand. .
The International Energy Agency renewed warnings in October that refiners face a crisis due to the growing divergence between refining capacity and demand for refined products. Their market share is further restricted by a growing share of petroleum products bypassing the traditional refining system. It comes from two angles; fast-growing biofuel supplies and petrochemical feedstocks which are primarily sourced from NGLs.
Driven by national fuel mandates, biofuel supplies are also expected to return to growth next year after a sharp contraction in 2020 due to lower gasoline demand.
According to Platts Analytics, demand for fuel ethanol and biomass-based biodiesel is expected to rebound by more than 300,000 bpd next year and continue to exceed growth in crude demand.
Supported by a more focused policy on clean fuels in the aftermath of COVID-19, the IEA now sees the production of biofuels for transport reach 186.1 billion liters, or 3.21 million b / d, in 2025 , an increase of 14% from 2019 levels. Globally, biofuels meet about 5.4% of road transport energy demand in 2025, up from just under 4.8% in 2019 .
Following a contraction of around 4% in 2020, next year could also be a starting point for NGLs, a key raw material component for refiners and petroleum plants that includes ethane, propane, gas. butane and natural gasoline.
Global LGN supplies, which are heavily dependent on U.S. shale growth, are expected to stagnate in 2021 before continuing to outpace crude growth, Platts Analytics believes.
According to the IEA’s long-term central oil forecast, demand for crude will increase by 4% over the next decade to peak at 80.6 million b / d in 2030. During the same period, however, NGL volumes will increase 4% to 20 million bpd, or nearly a fifth of the total liquid pool.
The return to strong growth in the NGL supply will add to an increasing liquid pool from biomass, leading to a decrease in crude oil market share. The combined demand for NGLs and biofuels will increase by more than 3 million bpd over the next decade to reach 23.6 million bpd to represent 22% of global liquids, according to the IEA.
Gloomy refining outlook
The destruction of oil demand from the pandemic is being felt most acutely by refiners in the United States and Europe, which have seen their margins collapse, and growing volumes of biofuels and NGLs are only growing. add to the gloomy outlook.
Planned refining capacity additions in the Middle East and Asia will exceed the rebound in fuel demand next year. Platts Analytics estimates that global crude refining demand growth will only exceed an average of 167,000 b / d per year over the next two years, compared to a five-year pre-COVID average of more than 800,000 b / d per year.
“A continued influx of biofuels and NGLs will put more strain on crude deliveries in 2021,” Platts Analytics said in a recent memo. inevitable.”
Wood Mackenzie estimates that 1.4 million b / d of European refining capacity is at serious risk of shutdown by 2023. By then, regional refining margins are expected to hit a new low, with 65% of plants having margins. net net zero or negative, the energy research group is growing.
Poor margins and low utilization rates are likely to continue to drive the current trend for US and European refiners to convert existing refineries or start co-processing renewable diesel or HVO (hydrotreated vegetable oil) at their facilities. The pandemic has also stepped up the focus on chemical recycling technologies, which will further reduce demand for crude and widen the gap between crude capacity and cycles.
With rapid changes underway in the global oil supply next year, as the world emerges from COVID-19, it may be the acceleration of low-carbon alternative fuels themes rather than the pace of the rebound. demand that refiners remember most across the board.