Calmer waters, but risk of a coming storm

If year-end prices and refining margins were the only metrics by which a year was judged, then 2023 was notably calmer than 2022. Both oil prices and refining margins were lower at the end of 2023 than they were at the end of 2022, refining margins markedly so. These values mask another volatile year in which the global crude oil and refined market proved its resilience as:

• The EU ban on Russian refined product imports quickly followed the ban on Russian crude, both of which reshuffled global crude and refined product trade flows, with Russian export levels staying resilient.
• Freight markets adapted to the emergence of ‘shadow fleets’ to circumvent the EU price cap, with the recent drought in Central America restricting Panama Canal transit volumes.
• The risk of wider regional conflagration to the Israel – Hamas conflict eased only a few weeks after the first attack.

Global oil demand hit a peak, surpassing 2019 levels, though jet fuel is yet to fully recover to pre-pandemic levels. The consequences of high oil prices in 2022 and resilient Russian flows spurred non-OPEC supply growth, such that OPEC+ needed to restrict production in 2023 to get the oil market back into balance.

High total refined product demand was more than matched by refinery capacity additions during the year, which combined strong Russian product exports to lower refining margins. The shift in the global crude oil slate that resulted from OPEC+ actions not only tightened the sour crude market (as light/heavy differentials narrowed), but also shifted refinery production away from middle distillates to gasoline and naphtha. Despite weak manufacturing activity and limited demand growth for diesel/gas oil, refining remained distillate led from the tightness in supply. The 3Q23 refining margin surge was a perfect example of this, as stocks in Europe were low, the European refining system was undergoing maintenance, as were the traditional suppliers in the Middle East and India, with Russia temporarily halting exports at that time to ensure sufficient domestic supplies. During 4Q23, the market imbalances and inefficiencies eased as refining capacity returned from maintenance and trade flow restrictions were lifted.

The weakness in petrochemical feedstock pricing (of both naphtha and LPG) ensured petrochemical integration added value at integrated sites despite petrochemical margins being so poor. With global ethylene capacity build outstripping demand growth by two to one over the last four years, the industry’s operating rate has fallen dramatically, challenging the profitability across the sector.

There were surprises; notably the recent Petroineos announcement of the closure of the Grangemouth refinery. The site did not appear as a candidate at ‘high risk of closure’ in Wood Mackenzie’s ‘Global refinery closure threat insight’, published in early 2023. However, this analysis did not reflect the hydrocracker not being operational since April 2023. It does confirm a key caveat on Wood Mackenzie’s closure risk analysis: major turnarounds may trigger closure decisions and the author understands one was scheduled at Grangemouth for 2024.

2024: back to normal for oil and refining?

Events are always uncertain, but Wood Mackenzie’s outlook on the fundamentals guides it to a more balanced environment for oil and refining in 2024. The company is forecasting 2024 global GDP growth to be at 2023 levels, but the economy to be more balanced, with growth in both services and goods. Oil demand will continue to break records, with an annual demand growth of around 2 million bpd projected. Oil supply is to keep pace with demand, with the OPEC+ group likely to use price as a signal for higher production. 2024 prices are forecast to be higher than 2023 levels in the high US$80s/bbl on average. As OPEC+ returns volumes, the global refinery crude slate will shift back towards medium/sour middle distillate rich grades, which will widen light/heavy crude differentials, meaning refining complexity becomes more valuable.

Refined product supply is to grow in 2024 as projects completed in 2023 achieve full production. The Dangote refinery in Nigeria is a key project to watch given its importance to gasoline balances in West Africa. Wood Mackenzie is less optimistic on the Dos Bocas refinery achieving commercial operations during 2024. Both refineries are gasoline focused, which emphasises that the global refining system will remain distillate led throughout 2024 in Wood Mackenzie’s base case forecast. The key events that drive crack spreads are:

• Commercial operation of the Dangote refinery, as that will influence Atlantic Basin gasoline.
• Timing of the recovery in manufacturing activity and growth in global jet fuel demand relative to the return of OPEC+ supplies, as this will influence global middle distillate balances, with European cracks retaining their premier position.

This article was originally published in the January 2024 issue of Hydrocarbon Engineering magazine. To read the full article, sign in or register for a free subscription.

Written by Alan Gelder, Vice President Refining, Chemicals and Oil Markets, Wood Mackenzie.

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/16012024/calmer-waters-but-risk-of-a-coming-storm/