Driving Discussions: What to expect from 2021

Author Argus

2020 is a year for the history books – global pandemic, road fuel demand destruction, social unrest, and the list goes on. With everything 2020 threw at us, are we ready for 2021 and what should we expect?

In this episode of Driving Discussions, John Demopoulos, VP North America Oil Products, and Stephen Jones, SVP Oil Market Strategy, discuss the highs and lows of 2020 and what’s to come in 2021.

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John: Hello and welcome to Driving Discussions. In this series we'll discuss the forces that affect road fuels globally and today's episode will be discussing the highs and the lows of the year ending and what we can expect from the year 2021. My name is John Demopoulos and I'm the vice president for North American oil products here at Argus and with me today is Stephen Jones, SVP for oil market strategy at Argus. Hello, Stephen.

Stephen: Hey, John. Good to be with you.

John: Likewise. Great to have you Stephen. So I wanna start off this episode by just talking through some of the highs and the lows of the year that we've seen and that will shortly be behind us. No doubt to many people's relief, we've had a pandemic, we've had U.S. election, and we've had negative WTI prices, we've had swings throughout the energy industry. Give us a sense for how you see the year 2020 now that it's almost over.

Stephen: Well, there's a lot that stands out when we kinda step back and reflect on 2020. It's been, you know, certainly a year for the history books. There's been numerous life-changing, the market shifting events, and you mentioned a few of them. Obviously, the pandemic has had untold economic consequences both in general economy, but the world markets in particular. We've had social unrest and political stresses from election, all of which is dragged on the markets in the sense of consumer confidence. And the biggest issue that really kind of stands out has been the unemployment situation that we can talk a bit about in a minute. But, you know, we've also had things like devastating fires, floods, and hurricanes, and the climate change agenda has really come into focus with a lot of these natural events that have happened on top of the pandemic and economic consequences. And so, you know, with hurricane effects on operations, in the oil industry, offshore production, refining systems in the Gulf coast, and elsewhere around the world, it's been a pretty life-changing year from that standpoint. We've had, you know, the most remarkable thing has been the drop in demand. You know, we lost almost 21mn b/d of demand from December down to April alone. And demand for the year is gonna be down almost 9mn barrels on average this year versus last year, 8.8 to be specific. And we're only recovering about, you know, 5mn barrels in 2021 which is only about 60pc or so of the total loss in 2020. So we're only clawing back, you know, less than two-thirds of the demand and so I would say the demand drop really, really stands out. In the U.S. in particular, you know, demand fell 2.6mn barrels or a drop of 12pc and a good portion of that was in gasoline. You know, gasoline makes up 4mn b/d of our market. It fell by 1.7mn barrels and only rebounding by about a half a million barrels at this point. So, you know, the drop have been tremendous, but it hadn't just been... Sorry. It just haven't been, you know, the demand side, the upstream, the refinery processing, the pace of industry's reaction to it and all was remarkable, and really stood out early in the year. But it's been a very, very trying, life-changing year for everyone involved.

John: It certainly has and you mentioned some pretty staggering numbers in terms of the demand drop that we've seen both across gasoline and jet, and to a lesser extent, diesel. But you also mentioned, you know, that some of that's come back. Not all of it has come back and not all of it is even expected to come back next year. And I guess my question is is it ever all gonna come back? And are we ever gonna see the same volumes of conventional refinery produced jet fuel and the same volumes of conventional refinery produce gasoline that we were seeing prior to this pandemic?

Stephen: Yeah. I don't think it'll come back to what we would consider in the U.S. to be a baseline on a global basis. It's probably threatened as well. We do expect it to continue to rebound and the real question becomes two factors to answer that. One is the vaccine and the pace of which it rolls out that allows the recovery for businesses and economy, and reemployment to occur, and ultimately the job situation, how fast will the consumer sentiment in the investment and supply chains, and so forth support employment to rebound. You know, the job losses in the U.S. alone were nearly 15pc and, you know, the job recovery is only tapered through November. We're still at 6.7pc unemployment in the States alone and, you know, there's great losses across our entire energy industry not just in upstream, but downstream. But when you look at the broader economic circumstance there is a lot of optimism. The vaccine is just starting to roll out. We've had a few emergency approvals. It's starting to be already pre-manufactured and already located in places for distribution. And the question that many analysts have been trying to answer is how fast will that occur. And just in the last week or so, here we are in the latter part, mid-part of December we're seeing analysts revise their expectations that a large portion of developed economies will have the vaccine by the first third of the year. That is a tremendous upside to the economic outlooks than people had just as short a period of two weeks, three weeks ago. There's a lot to be optimistic about, but we still have a very dark winter to get through, and a lot of volatility, and uncertainty with the sentiment of positive developments that ought to help carry us through these next few months to have a very clear picture of what this recovery might look like come January, February time-frame. I think that they are taking shape rapidly.

John: We're gonna have a vaccine and as you say, we've seen first the U.K. and then other countries including the United States starting to roll that out. Are we going to see... And I know that we've talked about this before, but are we going to see that gradual increase in vaccine-based immunity translating into the kind of transportation activity that leads to, you know, gasoline demand and jet demand? Are we actually gonna to see people within 2021 getting back on airplanes, recreational business trips, and getting back in the car for those road trips? Is that gonna start happening anytime soon?

Stephen: I think it will come in steps and it won't be uniform across all modes of transportation, you know. From a diesel standpoint, the diesel hits weren't as great as they were for gasoline and certainly not as anywhere near gasoline or diesel as it was for jet fuel. And so as the vaccine rolls out, the demand uptake is really gonna be dictated by how rapidly governments begin to relieve the lockdown steps and the conservative measures that have been warranted, and taken aggressively to contain the spread of the disease, the virus. As the vaccines take effect, I think it will vary in each country depending on the percentage of the populace that actually gets the vaccine and we will start to see subeconomies opening up within. But the international travel is likely to be the last part to really see the relief to allow jet fuel to come back. In the U.S. I think we'll start to see gasoline improving. As a matter of fact, I suspect there's gonna be pent up demand both in terms of just general travel, commutes resuming, things of that nature. There is a school of thought from some very vocal name or the individuals, be it Bill Gates and others that think that the work from home is here to stay for the efficiencies and the demonstrated ability of it being, you know, being productive for many segments of the economy. So we may not see a full return to, you know, previous status quo business as usual, but I think that's an overly conservative view. I think people are very humanistically connected to one another. They desire that social interaction, that need to be productive and work together in interface. There is a pent up desire, demand for that to rebound. And to a large extent there's a good portion of our economy that can't work from home that has been affected by this that will automatically rebound be it, you know, restaurants and shopping, and other things that have been disproportionately affected. So yes, simply put demand is going to rebound. I think the big question is just to what degree and exactly what shape it takes in the year ahead.

John: We talk about demand and we talk about the likely path of more gallons being sold and the pump being put on to aircraft. But of course that for the oil industry translates up the supply chain to a much bigger question about refinery, run carts about the mothballing of individual units or entire refineries. And actually in some cases this year translates to the opening up of refineries that had been mothballed and are now just starting back up again. Can you give us a sense for, you know, how capacity has been changing in recent months and what we expect from 2021 in terms of refinery closures, and even refinery openings if that's possible?

Stephen: Sure. Absolutely. So, you know, in the U.S. we've had around 800,000 b/d of refining capacity that has shut down and we have another 800 or so thousand b/d that has been idled if not permanently will remain down. So we got about 1.6mn b/d in the U.S. alone that's been affected by the pandemic demand loss and support for economics of throughput that make these assets uneconomic to restart anytime soon if not just be permanently rationalized. In Europe we're seeing similar circumstance. We have a lot of lesser competitive refining assets that have historically been protected by, you know, government programs for basically jobs employment issues and many of these assets have been converted over years to terminal operations versus to upgrading and processing. That trend will continue if not accelerate in the year ahead.

Globally, we have upwards of 2mn b/d of refining capacity that still needs to come offline to offset new capacities that are coming on stream. Most of it is in Asia that has been planned for quite some time and it's just coincidentally bad timing for these projects that were sanctioned, invested, and started to be constructed to happen simultaneously with the pandemic, the likes of which we've never seen that killed so much demand. So we've had a stretch where we lost demand while we are expanding capacity that put the balance of the weaker assets in the refining fleet at risk. And so what that's left us with is a lot of these assets that are being rationalized and some refiners being proactive to take their lesser competitive part of their portfolio offline, we're looking at redeploying them, the assets in renewable fuels type dispositions. There's investments that are required to do that. We've seen the news with, you know, Marathon, HollyFrontier, and others that are making significant investments to convert assets to process renewable feedstocks. And that is basically allowing some of these capacities to be redeployed in a different enterprise process to take advantage of the energy transition and the regulatory pressure, and the incentives to decarbonize if you will.

John: So Stephen, I think we've covered the sort of short-term and the recent picture, but what about the longer term impacts, and, you know, maybe a few positive things that we've seen over the past year including this deluge of commitments from various companies, various governments to clean up their acts, go carbon neutral, and leave the planet perhaps a better place than we might previously have expected? How do you see the energy transition progressing following all of the changes that we have seen?

Stephen: Yeah. That's a good question. And the energy transition really has been a point of emphasis. In the last half of this year there have been a lot of climate change activist and motives to address the energy transition aggressively while demand is down and implement plans, and strategies to take advantage of the immediate loss of petroleum demand. But the realistic situation is that, you know, 85pc of our energy demand is fossil fuel-based as a globe and the large part of that is coal. But another major part of that is petroleum-based fuel. And of that a good portion, the majority is transportation related. We still have the need for mobility. So we've got to find that right balance for an energy transition towards net zero emission objectives that refiners and producers are already making, and announcing plans as part of their ESG programs, environmental social governance programs. But the bottom line is that there are, you know, physical constraints to the pace in which many of these steps can be taken. And at the end of the day, the consumer has to make these decisions whether they can afford to support these emissions overall.

We have many governments that are already progressing the ban of the sale of internal combustion engines. We have upwards of over a dozen countries that are very announced bans as early as 2030, 2035 and, you know, upwards of two dozen cities that have done likewise. And so the real question becomes in 2021 and beyond as, you know, the Biden administration looks at rejoining the Paris climate accord and the industry itself begins to really adopt, and announce, and embrace aggressive net zero emission management plans, what will the consumer ultimately decide to do when faced with these options? And for that matter, the narrowing of constraints between electric vehicles versus conventional fuel vehicles. I think there will probably be a pent up demand for car purchases with the unemployment and so the cars that are sold today ultimately be on the road for many, many years to come. And so we have to begin working this as an industry aligned with the regulatory processes and government's aspirations to solve this problem to truly come up with a feasible plan that works across very diverse mobility markets to achieve environmental policy requirements to manage climate change ultimately.

John: And let me ask you, Stephen, you know, we talk about banning the internal combustion engine. How comfortable are you banning the internal combustion engine in the short-term does provide an environment answer rather than just shifting the environmental problem to other parts of the supply chain? Obviously, electricity production mining of missiles for batteries, all sorts of other things. Are we ready at this point to turn our backs on the internal combustion engine and is it for the good of the environment?

Stephen: I think it will vary in different markets as to how ready the overall system and the consumer, and then the net out of the emissions will ultimately reflect progress if you will towards EV adoption or for that matter, I think that in the midterm to, you know, a midterm pathway fuel, we're likely to see hydrogen as a source of mobility fuel as much or more so than EVs in many markets. You know, putting in power charging stations for EVs in certain countries is just unfeasible. In developed countries, fine. In developing countries, not so good. You know, hydrogen in canisters and whatnot where you can actually dispense it, and the fact that you don't have battery complexity for the vehicle, they can be lighter, more efficient, better range, we already produce hydrogen in current refining systems, and have ability to distribute. The point being is that is there is no singular answer even though there is a lot of attention drawn to electric vehicles because they are fun to drive, they are efficient, they are good for commutes, and managing range in certain longer trips where you can use the program to find your charging stations. But that's unique in certain developed markets. And there are some larger demand markets. However, we still have to have a very flexible portfolio solutions if we're gonna solve this problem. Not everyone can be driving electric vehicles at the pace that would be dictated to achieve these emission targets otherwise.

John: Absolutely. Stephen, thank you. It's been an extraordinary year in the oil market and in the broader energy sector. And no doubt that next year will be perhaps not quite as extraordinary, but still an interesting one. And we will continue to provide you commentary over the year ahead. If you've enjoyed this podcast, please do be sure to tune in for other episodes in this series, Driving Discussions. And for further information about the refined products market, please visit www.argusmedia.com.

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