COVID-19 is delivering an "abrupt shock" to the oil industry with more refineries set to close amid a dramatic drop in demand, according to a leading industry analyst.
Nine refineries, including two in the United States, have announced they are shuttering, while the future of another six "under review," Washington, D.C.-based IHS Markit notes.
Demand has decreased to such a degree since March that refineries need to cut production by 3.1 million barrels per day (MMbd) in North America, Europe and Asia-Pacific because the market will not recover sufficiently going forward. More are likely to close, IHS predicts.
"The 15 refineries have a collective distillation capacity of more than 1.7 MMbd, but that still means another 1.4 MMbd of excess capacity remains," according to the recently released report.
“A refining industry that was intended to accommodate a certain level of global demand must now contend with what is expected to be a significantly lower amount of it," said Rob Smith, director of IHS. "Rationalization that would have been spread out over the coming decade will now be compressed within the next few years. What was expected to be a long, slow adjustment has become an abrupt shock.”
Prior to the pandemic, IHS forecast global refined product demand would peak at around 94.5 MMbd in the mid-2030s. That peak level is now expected to be 91.1 MMbd.
"The geographic distribution of the coming rationalizations will understandably mirror regional demand forecast trends," Smith said.
"Europe, North America and OECD Asia—three regions that have already reached peak demand—can be expected to absorb the bulk of the impacts from the refining industry’s ‘Great Shakeout’.
"At the same time, 8 MMbd of new capacity will be added in markets that will continue to grow.”
Last week Royal Dutch Shell announced it was shuttering its Convent refinery in Louisiana after the company failed to find a buyer for the facility, the Houston Chronicle reported.
Marathon Petroleum MPC.N, the largest U.S. refiner by volume, plans to permanently halt processing at its refineries in Martinez, California, and Gallup, New Mexico.
There are hopes that development of a coronavirus vaccine will boost fuel demand next year. But for now IHS predicts fuel demand will remain almost 5% below pre-pandemic levels through 2025.
