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Key takeaways • Mobility trends are rolling over from Europe to New York to California and point to soft gasoline demand this holiday season • Refinery margins remain at low levels and will take time to recover due to weak consumption and a large capacity overhang • Despite 1mn b/d of recently announced refinery closures ahead, continued lockdowns could cap summer 2021 gasoline cracks Global refinery closures, extended shutdowns continue… In our October refinery capacity update (see Refiners double down on low margins), we highlighted that global refining capacity could grow by more than 6mn b/d over 2021-23 without further refinery closures. Since that report, numerous refinery closures have been announced, spanning the US, Northwest Europe, and the Asia Pacific region and totaling nearly 1mn b/d of capacity. What's more, a handful of struggling refineries, especially in the Asia Pacific region, have undertaken reviews to determine whether closing or repurposing are better options than continuing refinery operations. While the industry is moving in the right direction, more closures are likely needed, in our view. After all, we only expect global oil demand to reach pre-COVID-19 levels by 2023. … as refining margins remain economically challenging In addition to closing plants, the industry idled capacity and cut runs at active refineries, hoping to restore operations as margins improve. Platts estimates 16mn b/d of outages globally YTD, up nearly 8mn b/d YoY, which helped draw product stocks down from record levels. Yet, margins across most regions recovered only modestly, limited by a fragile demand rebound and capacity at the ready. Rising Renewable Identification Number (RIN) prices, which are implicitly embedded in US road fuel prices, give the appearance that US refining margins outperformed other regions in 2020. However, US refiners are required to generate or obtain RINs to comply with the Renewable Fuels Standard (RFS), so the strength of US margins is in part offset by the rising cost of RFS compliance and does not necessarily translate to better all-in margins for US refiners. Winter headwinds for gasoline, summer has small upside Gasoline cracks rallied to two month highs this week, but winter headwinds could push cracks lower once again. Rising COVID-19 cases across the Northern Hemisphere have triggered lockdowns and more restrictive measures seem likely. Mobility trends are weakening in Europe and states like California and New York, pointing to soft gasoline demand this holiday season. Furthermore, gasoline inventories have also risen to new five year seasonal highs recently. These factors could set winter gasoline cracks up for weakness in the coming weeks. Summer grade gasoline cracks have rallied nearly $2/bbl recently but remain just shy of our 2Q21 forecasts. While we remain constructive on gasoline cracks versus the forward curve for next summer, upside is likely limited due to the amount of underutilized refining capacity that could respond to higher margins.
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