MOSCOW (MRC) -- Petroleum consumption is rising around the world as the major economies exit from lockdowns imposed to control the coronavirus epidemic, but the uneven recovery presents challenges for fuel refiners, reported Reuters.
Refiners must cope with a much stronger rebound in demand for gasoline compared with diesel and jet fuel, reconfiguring their equipment to shift the yield towards light distillates and away from middle distillates.
The epidemic and measures introduced to control it have reduced petroleum consumption in three ways, with varying implications for the scale and speed of the recovery in fuel use:
First, the direct and indirect effects of mandatory lockdowns as a result of stay-at-home orders and the closure of some businesses, which sharply reduced personal mobility.
Formal lockdowns had the largest immediate impact on oil consumption because they hit personal movements, with the main impact on gasoline, the dominant motor fuel in all regions outside Europe.
But most mandatory lockdown measures have now been reversed, or eased, which has led to a big increase in mobility and gasoline consumption compared with early April, when lockdown measures were most intense.
Second, the effects of voluntary behavior changes, as individuals attempt to avoid crowded environments with a high risk of virus transmission.
Behavior changes have mostly involved avoiding mass transit systems and passenger aircraft, ensuring the largest impact has been felt on jet fuel.
Behavior changes have proved longer lasting, with scheduled flights and jet fuel consumption still down by around 50% compared with before the epidemic.
Senior airline executives expect passenger volumes to remain below pre-pandemic levels at least through the rest of 2020 and 2021, so jet consumption will be reduced in the medium term.
Third, the macroeconomic effects of lockdowns and voluntary behavior changes on household consumption and business investment, as consumers and firms respond to lower incomes and sales.
The epidemic and lockdowns have triggered a business cycle downturn, which will hit diesel especially hard since this is the fuel mostly commonly used by manufacturers and freight transportation firms.
Business cycle downturns take time to reverse fully, so there will be a hit to diesel consumption through the rest of 2020 and into 2021.
Light distillates (gasoline) were the most severely impacted by the first phase of the epidemic, but have also recovered fastest as lockdowns have eased.
Middle distillates (predominantly diesel but also jet) were less impacted in the first phase, but are now recovering more slowly and will be harder hit for the rest of 2020 and 2021.
By contrast, middle distillate margins have been gradually weakening since the start of the year on a deteriorating economic outlook and show no sign of a significant recovery.
Responding to both price signals and filling storage tanks, refiners slashed light distillate production at the height of the lockdown in favor of middle distillates – before sharply reversing course in recent weeks.
In the United States, refiners typically make around 1.5 times more gasoline than jet and diesel combined. But the ratio fell to 1:1 at the start of April before surging to almost 1.7:1 last week.
Gasoline is the largest output and principal revenue-earner for most refineries in the United States, so it dominates the decision about how much crude to process.
At the height of lockdown, refineries slashed their crude processing to avoid producing too much gasoline with no room to store it.
As the lockdowns have eased, however, refineries have ramped up their crude throughput to meet recovering gasoline demand.
The consequence has been the production of too much middle distillate, which has further weighted on diesel margins.
By restraining crude processing over the next couple of months, refiners should be able to reduce both gasoline and diesel inventories.
But the degree of normalization is likely to be greater for gasoline than diesel, which will leave middle distillate margins struggling.
As MRC informed before, global oil consumption cut by up to a third in Q1 2020. What happens next in the oil market depends on how quickly and completely the global economy emerges from lockdown, and whether the recessionary hit lingers through the rest of this year and into 2021.
Earlier this year, BP said the deadly coronavirus outbreak could cut global oil demand growth by 40 per cent in 2020, putting pressure on Opec producers and Russia to curb supplies to keep prices in check.
We remind that, in September 2019, six world's major petrochemical companies in Flanders, Belgium, North Rhine-Westphalia, Germany, and the Netherlands (Trilateral Region) announced the creation of a consortium to jointly investigate how naphtha or gas steam crackers could be operated using renewable electricity instead of fossil fuels. The Cracker of the Future consortium, which includes BASF, Borealis, BP, LyondellBasell, SABIC and Total, aims to produce base chemicals while also significantly reducing carbon emissions. The companies agreed to invest in R&D and knowledge sharing as they assess the possibility of transitioning their base chemical production to renewable electricity.
Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).
According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 595,170 tonnes in the first five month of 2020, up by 10% year on year. Deliveries of all ethylene polymers, except for linear low density polyethylene (LLDPE), rose partially because of an increase in capacity utilisation at ZapSibNeftekhim. At the same time, PP shipments to the Russian market was 457,930 tonnes in January-May 2020 (calculated by the formula production minus export plus import). Deliveris of exclusively PP random copolymer increased.
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