IEA says 3Q oil product stockdraw biggest in 8 years

The IEA estimates that the shortfall in global refinery output relative to demand hit an eight-year high in the third quarter. It also forecasts a continued lull in refinery throughput on the back of record-high natural gas prices.

In its latest Oil Market Report (OMR), the Paris-based energy watchdog estimates that global refinery production was around 1.7mn b/d short of demand in July-September, implying the largest quarterly draw on stocks in eight years. This underproduction was likely to have been the "main driving force" behind the steep rise in third-quarter refining margins, it said.

The IEA's latest estimate for global refinery throughput in the third quarter is 1.7mn b/d lower than its forecast in May. "Refinery performance in 3Q21 has disappointed overall compared to expectations earlier in the year," it said.

The IEA expects products markets to remain tight in the fourth quarter, reflecting seasonal maintenance programmes and higher electricity and hydrogen costs, driven by record-high natural gas prices. The agency has analysed the average cost of hydrogen production per barrel of crude processed and found that it is now roughly 10 times higher than it was in 2019. Refineries typically need to procure around 70pc of the hydrogen they use in units like hydrocrackers and hydrotreaters, to add to what they produce internally by naphtha reforming. The additional hydrogen mostly comes from steam methane reforming, which takes natural gas as an input. High natural gas prices have pushed the cost of this hydrogen to around $5-6/bl of crude processed, up from around 60¢/bl in 2019.

The IEA estimates that global refinery throughput fell by 950,000 b/d in September, wiping out August's 870,000 b/d increase. It forecasts a rise of around 500,000 b/d in runs this month, with upticks in the Middle East and other non-OECD regions offsetting a decline in OECD Europe. This divergence in refining activity may explain why traders expect Europe to be relatively heavily supplied with diesel from east of Suez in the fourth quarter.

On the demand side, the IEA said: "Demand for LPG, naphtha, fuel oil and other niche products has been higher than pre-pandemic levels in both 2Q21 and 3Q21" but "gasoline, diesel and jet fuel overall are still lagging". It acknowledges that up to 500,000 b/d of demand could be added through gas-to-oil switching worldwide in the coming months, prompted by high gas prices. But it expects this to be tempered by lower than previously forecast economic growth and a seasonal downturn in fuel demand.

By Benedict George