A Slow Grind Higher For Refined Product

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Close-up of industrial pipelines of an oil-refinery

More refinery rationalization to come?

Unsurprisingly refinery margins have slumped this year, with COVID-19 hitting demand for refined products.

The weakness in margins has seen refineries around the globe cut run rates significantly this year, something that the market has needed to limit a further build-up in refined product inventories. Refineries are yet to get back to pre-COVID-19 utilization rates, and this is something that we are unlikely to see until late 2021 at the earliest. In fact, given the extremely weak margins we have seen this year, a number of refineries have announced plans to permanently shut or repurpose themselves.

Since the beginning of 2020, it is estimated that around 1.4MMbbls/d of global refining capacity closures have been announced or openly discussed by companies, according to IHS Markit. While the impact of COVID-19 is key to these closures, the other important driver behind this is that we continue to see new and more efficient capacity coming online in parts of Asia and the Middle East, which makes it increasingly difficult for older refiners to compete. This suggests that even as we see demand returning to more normal levels, we will likely continue to see refinery rationalization through 2021.

Fuel oil and naphtha the stand outs, but likely to weaken over 2021

Despite the pressure we have seen in refinery margins there are a couple of products, which have performed well over 2020, including high sulphur fuel oil (HSFO) and naphtha.

While naphtha came under significant pressure during the peak of the lockdown period in 2Q20, as a result of the weaker gasoline complex, it has rallied strongly since, as gasoline demand has improved. In addition, naphtha remains the favourable feedstock for the petrochemical industry, with naphtha trading at a discount to the alternative feedstock, propane. Naphtha is likely to remain the preferred feedstock over the winter months, with propane prices likely to remain relatively more expensive over these months due to heating demand. However, as we move further into 2021, we would expect to see some renewed pressure on naphtha cracks.

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