Refining has been transformed into an industry which is once again attracting significant investment. There is no doubt that a series of factors have converged to improve the profitability of the industry dramatically, especially in the US:
- Growth – oil demand has raced ahead;
- Historic Underinvestment – refinery capacity supply growth has lagged behind;
- Oil Prices – high crude oil prices and widening light-heavy crude price differentials have provided a significant boost for highly upgraded facilities.
Hurricanes, growing deficits and recent specification changes have further stoked the US boom.
However, with new capacity beginning to hit the market over the next few years when will the scales begin to tip?
Wood Mackenzie, drawing from our Global Products’Outlook service, expects demand to outstrip capacity additions for the next two years thus maintaining the current sustained period of strong refining margins. However, in the medium term, the market may begin to rebalance by around 2010 as more capacity is added.
A critical market to watch as a bellwether for any correction is the US gasoline market. US gasoline consumption represents over 40% of total global gasoline demand, and the US is home to about 20% of total world refining capacity.
Looking further out to 2020, the US gasoline deficit – a key factor underpinning margins in the Atlantic Basin – could be significantly lower than it is today as domestic gasoline supply increases. As a result, there could be fierce international competition to supply the US market, and potential major implications for global trade flows.
The US Gasoline Market as a Bellwether for a Market Correction
The recent market tightness and associated high prices and margins are stimulating a market response on both the demand and supply sides of the equation.
Demand. In the short term, oil product consumption has remained surprisingly inelastic to price fluctuations. Wood Mackenzie maintains, however, that in the medium to long term, consumers will begin to respond. This response will take the form of improved energy efficiency and the uptake of alternative energy products. The key questions concern the degree of the response and the ultimate impact that it will have on refined product demand.
Supply. Equally, there has been a wave of refinery investment announcements driven by the prospect of attractive returns. How much of this new capacity will realistically be built over coming years, where and when will it be built, and what will be the impact upon oil product supply?
In the current state of tight market fundamentals – and with the predominant US position on both sides of the supply/demand equation – a disruption in the US gasoline market sends ripples through the global market. This was evident when global gasoline prices spiked in 2005 when the hurricanes hit the US and again in 2006 when MTBE was phased-out.
US Gasoline Demand Response to High Oil Prices
Gasoline demand has grown at 1.6% per annum over the past decade as car ownership and travel have increased, while vehicle fleet efficiency has changed very little. Passenger car numbers have grown only very slightly over the past twenty years with much of the incremental growth being in light truck sales, such as sports utility vehicles (SUVs) and multi-purpose vehicles (MPVs). These light trucks have more relaxed mandatory fuels efficiency standards than cars. Indeed, the average fuel efficiency of the light truck fleet has remained largely unchanged since 1990, although the passenger car fleet efficiency has improved somewhat.
In total there were 780 cars per thousand people in the US in 2005, already the highest in the world. Recent high pump prices have brought fuel economy into focus once more and sales of SUVs have faltered. Wood Mackenzie expects that the fuel economy of the fleet will gradually improve as motorists seek more efficient cars and SUVs. Some of this improvement will be mandated. Unchanged for a decade at 20.7 mpg, the light truck fuel efficiency standard is now being increased progressively between 2005 and 2007 to 22.2 mpg. Hybrid sales will account for some of the efficiency gains as sales are increasing – sales could reach one million vehicles by 2010.
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