As global oil demand outlook weakens, planned refining capacity boom set to keep utilisation low

The ongoing energy transition combined with the effects of COVID-19 will drive future oil demand to lower levels than what was expected just months ago. As a result, a plethora of planned refinery additions will far exceed closures towards 2025, and utilisation rates will likely never recover to pre-pandemic levels unless some capacity closes early, reports Rystad Energy.

New and expanding projects from the beginning of 2020 and up until the end of 2025 are estimated to add about 13mn b/d of global capacity as Asian and Middle Eastern refiners complete scheduled expansions and newbuilds, according to the market analyst. Meanwhile, a surge of capacity closures will reach only about 3mn b/d, a relatively small number compared to additions.

This means that net refining capacity additions will reach 10mn b/d, between the beginning of 2020 and the end of 2025 – an increase that oil demand will never be able to cover, even when the effect of COVID-19 becomes a thing of the past, adds Rystad.

The market analyst projects a net growth of approximately 400,000 b/d in 2020. As a result, global refining capacity will be driven to 103mn b/d, up from 102.6mn b/d in 2019. With oil demand plunging in 2020, adjusted liquids demand will only reach 77.2mn b/d, causing utilisation* to drop to a low of 75% for the year from 83% in 2019, it says.

As oil demand grows from 2021 onwards, refinery capacity utilisation will too, reaching 78% in 2021 and peaking at 80% in 2022 and 2023. From that point, oil demand growth rates will fall behind those of refinery capacity additions and utilisation will consequently fall and reach 77% in 2025.

‘As oil demand will likely peak a couple of years after 2025, if not earlier, for utilisation to rise again, the least efficient and most poorly-located refinery capacity is doomed to close. A long period of rationalisation is ahead of us if we are ever to return to pre-COVID utilisation rates and margins,’ comments Julie Torgersrud, Oil Markets Analyst at Rystad Energy.

The year 2020 has been a devastating one for refiners, as historical overcapacity was accompanied by a drop in global fuel demand, slashing margins and forcing already struggling refineries into early retirement. By November 2020, 28 refineries had announced closures. Rystad’s analysis shows that permanent capacity reductions in 2020 will surpass 1mn b/d, while more closures loom given the additional idled capacity awaiting final decisions.

The bulk of announced shutdowns will take place in mature markets like Europe, North America and Japan, where 12 facilities are expected to close before the end of 2021. Asian refineries are also victims to the changing refinery climate and are expected to remove over 1mn barrels of daily refining capacity by 2021. Some 50% of Asian capacity closures stem from China, which has 550,000 b/d of announced closures from less-efficient, independent ‘teapot’ refineries** to make way for the giant Yantai refinery complex in the Shandong oil hub.

Rystad expects idled refinery capacity to exceed 950,000 b/d in 2020 as the recovery in fuel demand remains sluggish. Some 760,000 b/d of globally idled capacity stems from closed refineries in North America and Europe, while five refineries on the American Atlantic coast remained mothballed in 3Q2020. Idling capacity was a hurried response to the declining fuel demand, as temporarily shutting unprofitable refineries proved more economical than continuing to operate on already tight margins.

Capacity additions in 2020 are estimated to add 1.4mn b/d despite the tough economic climate for refiners. Rystad then expects an additional 6.9mn b/d until the end of 2023, leading to a net capacity increase of roughly 5.4mn b/d for the four-year period.

Between 2019 and 2025, the discrepancy between global refining capacity and total liquids demand is expected to increase by 8.1mn b/d to a gap of over 11mn b/d.

Significant capacity additions in regions traditionally relying on product imports, like South-East Asia, could render these nations to become net exporters, notes the market analyst. Consequently, refiners in high-cost regions like Europe and Australia would be squeezed out of the market, which would accelerate the rate of refinery closures in these regions.

*The utilisation rate is computed as the ratio between Rystad’s adjusted liquids demand and refinery capacity, instead of the usual crude intake over refinery capacity. 
** Teapot refineries have relatively small capacities ranging from 20,000–100,000 b/d and are independently run. They are perceived as relatively inefficient compared with larger state-owned refineries.

Figure 1: Global refining capacity compared to total demand and utilisation rate, in mn b/d
Source: Rystad Energy