McKinsey Energy Insights report forecasts global refining capacity growth to exceed demand until 2020

London, UK, 07 December 2016


McKinsey Energy Insights (MEI), the data and analytics specialist that provides distinctive insight and support to the global energy industry, forecasts that until 2020, global refining will move towards lower utilization and margins as capacity growth exceeds demand. Post-2020 market conditions are expected to improve with higher demand for distillates due to marine pollution (MARPOL) regulations.

MEI’s latest Global Downstream Outlook notes the last two years have seen major shifts as a result of falling crude price, a subsequent rise in global product demand and the fuel / oil balance. This, combined with recent events such as the diesel vehicle emissions scandal and the International Maritime Organization’s cap on sulfur in bunker fuel by 2020, has led to an uncertain outlook for the global refining market.

MEI modelled a high and low growth demand case, with the high case in line with the latest industry consensus. In the high case, MEI sees light product demand growing at 1.2% annually through to 2020. Asia will also remain the leading consumer of light products and it is predicted that diesel will provide the biggest demand growth post-2020. However, this is dependent on vehicle improvements, fuel substitutions and diesel emission regulations.

Cherry Ding, Senior Analyst at MEI says: “In the near term, global refining capacity is expected to grow faster than light product demand, which will contribute to a rising oversupply of capacity and will result in lower utilization and margins for refiners.”

“A huge factor in both of these demand growth cases is the industry’s response to the upcoming global sulfur cap in marine bunker fuel. While we expect the payback for installing scrubbers in new vessels to be quite attractive, we anticipate there will be some non-economic barriers to new installations and retrofits in the first few years post-MARPOL. The rate of installations and retrofits, as well as uncertainty around refiners’ response in terms of new bottom of the barrel investments, will all have a big impact on the global resid markets and refining margins.”

The outlook also highlights that North American crude markets are likely to remain tight until 2020, when a resurgence of unconventional crude supply could push the market back to export net-back pricing conditions.

The research is based on results from McKinsey’s Global Downstream Model, a macro-based global supply and demand balances and flows tool and OilDesk, a scenarios-based price-forecasting tool.

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