More refining capacity is coming online in the Middle East, China and Africa at a time of tepid demand growth, which will usher in a period of lower margins, capacity utilization and consolidation, according to a new report from Goldman Sachs.
Global oil demand has taken an enormous hit from the Covid-19 pandemic.
Even if it takes a few years for demand to recover, Goldman analysts say that “mega refining projects” will come online between 2021 and 2024, and the new capacity will force all refineries to lower their utilization rates by 3 percent over that timeframe.
Fiercer competition between refineries, including the newer ones, will squeeze margins, and may force older refineries in developed countries to shut down entirely.
As for products, the bank says that gasoline will rebound strongly as road traffic returns.
Fear of mass transit amid a pandemic is pushing more people into passenger vehicles.
Jet fuel, on the other hand, is “the biggest loser from this crisis,” and may not return to pre-pandemic levels until 2023, Goldman says.
As Electric Vehicle’s begin to gain steam in the years ahead, Europe will really lead the way, where diesel is much more prevalent in the passenger vehicle segment. In that sense, EVs eat into diesel demand, according to Goldman.
On the supply side, all of the new refineries that Goldman analysts cite tend to be more distillate heavy, which will also weigh on diesel margins.
The report provides some positive and negative forecasts for Africa’s richest man Aliko Dangote, who is spending about $15 billion to construct a 650,000 barrel-per-day oil refinery and petrochemical plant in Lagos, Nigeria’s commercial capital.