<article><p class="lead">The Covid-19 demand shock, large-scale refinery expansions and expectations of a long-term structural decline in consumption have created a refining capacity overhang that can only be resolved by "massive closures", the IEA said today in its medium-term <i>Oil 2021</i> report.</p><p>A "third wave" of refinery rationalisation is underway, with 3.6mn b/d of shutdowns announced for 2020-26. But this is 2.4mn b/d short of the 6mn b/d that is needed to allow average refinery utilisation rates to return to a sustainable level of above 80pc, the IEA said. Shutdowns on this scale would be comparable in size to two previous periods of contraction in the 1980s and in the aftermath of the 2008 financial crisis. They will be required to help counter 8.5mn b/d of new refining capacity expected to come online by 2026. The 3.6mn b/d of announced shutdowns will leave net capacity additions at 4.9mn b/d in 2020-26, double the forecast growth in demand for refined products over the period, the report said. </p><p>Driving the third wave of refinery closures is a downward shift in transport fuel consumption, with the IEA forecasting that combined demand for "refinery-supplied" gasoline, kerosine and diesel will be 170,000 b/d lower in 2026 than it was in 2019. This demand shock has been accelerated by the Covid-19 pandemic, which resulted in a 13pc drop in transport fuel demand last year and a 10pc cut in refinery throughput to a 10-year low of 74.4mn b/d. Average refining margins plunged to their lowest in at least two decades last year.</p><p>Compounding the challenge for refiners is the changing demand profile for oil products. A third of oil demand growth in 2019-26 is to be met by products that entirely bypass the refining sector, such as natural gas liquids (NGLs) and biofuels, according to the IEA. In this context, the new market for very low-sulphur marine bunker fuel offers a "last opportunity" for traditional fuel-oriented refiners, it said. Including VLSFO, "premium" refined product demand is forecast to grow by 1.8mn b/d through to 2026. For existing refiners to keep their product yields unchanged, new refineries would need to cap yields of premium transport fuels at just 30pc, the agency said. For comparison, combined gasoline, kerosine and diesel yields were 72pc in 2019. The pandemic has "effectively offered refiners a sneak peek into the future of sharply lower transport fuel demand", the agency said, adding that refiners "should use this opportunity to adjust their strategies accordingly".</p><p>The challenge is most acute for refiners in the Atlantic basin, where refining activity last year fell to its lowest level in 50 years and will remain below pre-pandemic levels in 2026, according to the IEA. Atlantic basin demand for refined products is forecast to fall by 1.4mn b/d in 2020-26, while net refinery capacity additions are expected to amount to 480,000 b/d over the same period, coming from African and north American projects. This will further intensify competition in the refining industry and is "very likely to result in additional capacity closures", the IEA said.</p><p class="bylines">By Harry Riley-Gould</p></article>
