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Since peaking in early January, the number of new daily reported
cases of COVID-19 has declined significantly. Meanwhile, an
unprecedented global vaccination campaign is ramping up, with
millions of doses being administered each day. Thus, despite the
emergence of several more highly transmissible COVID-19 variants,
there is reason to believe the end of the pandemic is in
sight—or at least just over the horizon. Correspondingly,
global refined product demand—after holding steady for several
months—is beginning to recover once again.
And yet the refining industry is still facing a long road to
recovery, as underscored by the recently announced closure of
ExxonMobil's Altona (Australia) refinery. Most benchmark net
refining margins remain below zero and are projected to remain so
throughout 2021. This is due to the short-term surplus caused by
the 2020 demand collapse, but the industry must also reckon with
the fact that the pandemic has dealt a permanent blow to global
fuel consumption. In short, the world is "oversupplied" with
refining capacity. Specifically, IHS Markit projects that 4.5 MMb/d
of refining capacity must close (relative to the pre-pandemic
baseline) to align with the new long-term demand reality.
Including Altona, around 2.3 MMb/d of refinery closures have
already been completed or announced as part of this "Great
Shakeout." This already exceeds the 2.2 MMb/d that was closed
during the three-year period following the Great Recession—and
IHS Markit believes another 2.2 MMb/d of closures are still to come
in the next couple of years.
The pace of these closures, as well as the demand recovery, will
determine how swiftly and strongly refinery margins improve. If
refiners continue to be aggressive in their portfolio culls and/or
if demand returns faster than expected, margins will recover more
quickly than in the IHS Markit base case outlook. Conversely, if
demand stalls and/or the industry balks at additional closure,
margins—and refiners—will suffer.
