COVID-19 could hasten the demise of some oil refineries
needs a loss-making, inflexible oil refinery in a world where demand for petroleum has been obliterated? We’re about to find out.
When consumption of transport fuels collapsed this year because of coronavirus, much of the industry moved into survival mode, cutting processing rates and even temporarily stopping refining in some cases. While that helped prop up the industry’s margins for a while, a combination of rising crude costs and still-weak end-user demand are starting to bite.
With many oil traders and analysts expecting a slow and uncertain recovery in demand, there’s an open question about where that leaves refineries supplying tens of billions of barrels of fuel each year. It seems likely that many of the weaker plants will be permanently shuttered.
The refining industries in Eumand rope and the U.S. have long grappled with overcapacity as bigger, more efficient plants got built in the Middle East and Asia. The expansions mean that plants making fuel in France or Belgium, for example, have found themselves increasingly competing against supplies imported from the likes of India, Saudi Arabia or even as far afield as South Korea.
In recent weeks, Asian refineries have enjoyed stronger local demand that’s kept the region’s plants busy, while a recovery in Europe and the U.S. has lagged.
While the refining industry globally has been forced to take capacity offline, the hit has probably been bigger in Europe and the U.S. than in Asia, according to Fitch Ratings (Fitch is owned by the Hearst Corp., the parent of the Houston Chronicle.) China, in particular, is a relative bright spot — its refinery runs have recovered, and margins are being helped by a government-set floor in product prices.
The combination of a tightening crude market and weak deWho
is set to keep refining margins at historic lows over the coming months, researcher JBC Energy said in a note.
“In this difficult environment, efforts by the more resilient refiners, not only in Asia, to gain market share may further contribute to pushing out the most vulnerable players, ultimately leading to some pressure relief in the medium to longer term,” JBC said.
Refiners in Australia and New Zealand also are under pressure, while Asia, especially Japan, could also be affected, according to Facts Global Energy. In recent weeks, America’s refiners responded to the downturn by slashing rates to a minimum and idling some gasoline-making units. Marathon Petroleum Corp., the biggest U.S. refiner, temporarily shuttered two of its refineries.
The devastation that COVID-19 has wrought on demand “is not over yet,” Tom Nimbley, chief executive officer at the New Jersey refiner PBF Energy, said on an earnings call, even as U.S. demand was showing signs of recovery. PBF is running its six refineries at minimum rates.
“2020 will be a tough year for the industry,” said Dmitry Marinchenko, a senior director at Fitch Ratings, which has taken negative rating actions on Marathon Petroleum, and Turkey’s Turkiye Petrol Rafinerileri AS, or Tupras.Weak margins in the industry could last for years, said Jonathan Lamb, an analyst at Wood & Company. He says demand could take a couple of years to recover at best.
“In the meantime, capacity continues to increase,” he said. “Hanging on in the hope of better margins is not a smart move.”