Viewpoint: IMO to support refining margins in 2020

Wider middle distillate and gasoline cracks will support higher European refining margins in 2020 compared with 2019.

Middle distillates constitute around 50pc of EU-16 refining output, while gasoline accounts for a further 20-25pc. The upcoming IMO-2020 marine fuel sulphur cap is likely to widen crude margins for both products — although an uncertain global economic outlook could act as a drag on oil products demand.

European refining margins were supported throughout the summer of 2019 by firm transatlantic gasoline demand, partially as a result of the closure of the 330,000 b/d Philadelphia Energy Solutions (PES) refinery. The 3-2-1 margin, a measure of two barrels of gasoline and a single barrel of diesel against three barrels of crude — and a rough indication for refining margins — averaged over $10/bl over the second and third quarters. But refining margins subsequently faced pressure in the fourth quarter as market expectations that heightened demand for marine gasoil (MGO) ahead of the IMO-2020 marine fuel sulphur cap would tighten middle distillate availability failed to materialise. The 3-2-1 margin averaged just $6.50/bl in the first third of December, with multiple refiners in northwest Europe and the Mediterranean looking to cut crude runs as a result.

But middle distillate margins are expected to recover in 2020, partially as a result of IMO-related MGO demand. In September the IEA forecast a total 200,000 b/d gasoil stock draw as a result of heightened IMO demand in 2020, while Goldman Sachs forecast diesel cracks will average $20/bl in 2020. In comparison, diesel cracks have averaged $16/bl in the year to date. Global gasoil demand will climb by 1mn b/d in 2020, according to the IEA, or around 8pc.

Similarly, gasoline margins are likely to be wider in 2020, as the closure of the PES refinery in June — formerly the largest refinery on the US Atlantic coast — has provided structural support to transatlantic gasoline flows, requiring shipment of around 10 additional cargoes each month. And IMO is also likely to offer support to gasoline margins by diverting vacuum gasoil (VGO), a common gasoline feedstock, into the middle distillate blending pool. The IEA forecasts global gasoline demand to rise by 74,000 b/d in 2020, or 3pc. Total oil products demand will rise by 5pc, or 1.2mn b/d.

But the effect of IMO — which will be broadly supportive for oil products demand, and in turn refining margins — could be offset completely should global economic output falter in 2020. The International Monetary Fund (IMF) revised its 2020 GDP growth forecast to 3.4pc in its October report, reflecting a general weakening in economic activity.

European economic output has been weak in 2019, notably the Eurozone's manufacturing sector has been in contraction since February, which has acted as a significant drag on European middle distillate demand throughout the year. Ongoing uncertainty regarding the nature of the UK's withdrawal from the EU could also weigh on economic activity in Europe.

On a global level, US trade policy will continue to be an important variable in 2020 — having weighed on oil products demand growth in 2019. Current trade barriers between the US and China will reduce global economic activity by 0.8pc in 2020, relative to a no-tariffs baseline, according to the IMF. But the 0.8pc drag on growth also highlights latent oil products demand — any easing of trade tensions ahead of the US presidential election in November could translate into an increased oil products call in 2020.

Total crude runs in Europe are likely to remain little changed on the year in 2020. The IEA forecasts OECD European throughput will total 12.2mn b/d, compared with 12.3mn b/d in 2019. Non-OECD European throughput is also forecast steady year on year at 600,000 b/d.

By Harry Riley-Gould