Some oil market analysts said that the global recession caused by the coronavirus pandemic would hasten the long-term rationalisation of the worldwide refining industry. Refinery margins have slumped to their lowest since 2009 dragged by movement restrictions and economic halt which cut fuel consumption by millions of barrels per day.
Meanwhile, upstream producers tighten their taps to support crude oil prices. As a result, worldwide refiners are facing rising input prices and depressing output prices at the same time. This leads to lots of idle capacity, squeezed margins, and poor profitability across the global refining industry. The impact will be more profound on old, small, and less sophisticated refinery complexes, mostly in Europe and North America.
Adding to the pain, these refiners will likely face tough competition from larger refineries in Asia which are equipped with more modern and sophisticated facilities. These Asian mega-refineries will be able to achieve economies of scale and process poorer quality, cheaper crudes, to produce more high-value products. These refineries are also closer to demand centres in Asia. Oil demand in China, India, and the Middle East has been increasing at a compound rate of 6%, 5%, and 3% annually in the last 25 years, respectively. Meanwhile, demand only grew by 0.4% a year in the US and fell 0.2% a year in Europe since 1995.
An industry survey found that around 1.4 million bpd or 9% of Europe’s refining capacity is under threat of rationalisation in 2022-2023. This was before the coronavirus pandemic, which wiped over 20% of global oil demand. In contrast, Asia Pacific’s crude distillation capacity is expected to grow by 2.7 million bpd by 2024. The region will contribute to 42% of the total global expansion, followed by the Middle East (23%) and North Africa (18%).
