One of the most pronounced trends in the Western world since the onset of the global financial crisis has been the plummeting demand for petroleum and the subsequent losses for the refinery industry, which has been squeezed by a combination of declining credit availability, higher prices for input crude and lower demand/prices for refined products (over-capacity). This ever-deepening trend was discussed on TAE earlier in Petroplus – The Tip of an Iceberg.
What we are witnessing within the refinery industry and the petroleum industry in general is a situation in which higher prices, mainly fueled by leveraged speculation, geopolitical tensions and rising demand in the East, are burning themselves out by destroying demand in a positive feedback spiral. Here is a portion of the conclusion reached in the post linked above:
As is the case with most analyses by official institutions such as the IEA, we can safely assume that the effects of credit contraction on refinery utilization are being under-estimated. Refineries forced to scale back or go off-line in the short to medium-term will negatively impact crude oil demand, and we should see this add to the pressure currently weighing on crude oil prices. Lower prices will then feed back into the marginal financial pressures facing the oil industry.
For those who think that oil prices can only go up, up and away from here on out, I am still waiting to hear how plummeting demand for crude oil from refineries, which are now dropping off like flies, will contribute in the short-term. Some may argue that the developing economies of the East will single-handedly keep prices elevated, but they are ignoring a) the speculative premium built in to oil prices and b) the fact that these emerging economies do not exist in a bubble that is isolated from the effects of demand destruction in the West, i.e. a decoupled global economy.
Demand for oil is certainly still rising in the emerging economies at a rate faster than demand is falling in the West, but the question is how long before the latter burns out the former. In our hopelessly inter-connected global economy, there is little doubt in my mind that it will happen, just like higher oil prices will burn themselves out by feeding back into downstream demand destruction in the refinery industry and businesses/households. Anyway, here is the latest on the Iceberg that has had its way with Western refineries, courtesy of the Financial Times:
Energy: Refined out of existence
Sunoco petrol stations are a fixture of the US eastern seaboard, their blue-and-yellow awnings touting the brand’s status as official fuel of Nascar racing. But after July, none of the petrol they sell will actually be made by Sunoco.
The 126-year-old company’s decision to quit the refining business is the latest sign of the tumult in downstream fuel markets that is accompanying a global shift in oil use. As consumption flags in developed economies and grows in emerging markets, refineries are dying from Japan to Pennsylvania, the Sunoco home state where oil wells drilled in the 1850s begat the petroleum age.
The upheaval highlights the challenges facing policy makers as rising petrol prices endanger growth in the world’s biggest economy. Washington has floated largely predictable responses: drill more, punish speculators, work harder towards energy self-sufficiency. But global trading on markets for petrol, diesel and heating oil highlight the persistent fact of America’s energy interdependence.
Half the refining capacity on the populous US east coast is set to disappear. Sunoco has pulled the plug on two refineries already and warns that another in Philadelphia will close in July if no buyer steps forward. ConocoPhillips is trying to sell a refinery in Pennsylvania, idle since last year. On May 1, it will spin off its refining business. More than 3m barrels of daily refinery capacity have closed in western countries, since the financial crisis, says the International Energy Agency, the west’s oil watchdog. Emerging economies have meanwhile added 4.2m b/d in capacity, with another 1.8m b/d coming this year. “It’s really a tale of two markets,” says Toril Bosoni, IEA senior oil analyst. “You have very contrasting pictures for economic growth and demand, and refining is reflecting what’s going on elsewhere.”
A good vantage point is Marcus Hook, a borough of 2,400 people squeezed into Pennsylvania’s industrial south-east corner. J.N. Pew, founder of the Sun Oil Company, built a refinery there in 1901 to process crude borne by ships from the legendary Texas gusher known as Spindletop. It was one of many refineries to line the wide Delaware river. “If you were a child who grew up in this region, the refineries have been part of [its] fabric … from the first moments of awareness,” says Patrick Meehan, a Republican congressman who represents the area. Among his memories: “The smell.”
Late last year, Sunoco put the Marcus Hook plant on the auction block and stopped feeding it crude after losing nearly $1bn in the past three years at its east coast refineries. The problems began at the docks. Marcus Hook relied on foreign oil delivered by tanker including 34.6m barrels from Nigeria, 5m from Norway, 3.3m from Angola and 3m from Azerbaijan last year, government records show.
Low in sulphur and yielding lots of high-value products such as petrol, this was some of the most expensive oil on the planet. Nigeria’s Qua Iboe, a representative variety, averaged $114 a barrel in 2011. For several weeks, a barrel of Qua Iboe cost more than a barrel of reformulated gasoline blendstock, ensuring negative margins for refineries such as Marcus Hook. West Texas Intermediate crude, similar in quality, averaged just $95 last year. Texas oil production rose 25 per cent to top half a billion barrels for the first time since 1998. But Marcus Hook could not buy it, as no pipelines link it with Texas.
“You’ve got crude oil in this country. It’s just a question of getting it to where the refineries are,” says Denis Stephano, labour union president at ConocoPhillips’s mothballed Pennsylvania refinery. In his union hall, Mr Stephano points to a map of the US’s piecemeal pipeline system, which hangs next to a placard reading “Save refineries, save lives!”
In Washington, the signature energy battle of the past year has been over the Keystone XL pipeline, which a company wants to build to connect Alberta’s oil sands with Texas. This would be likely to raise depressed Canadian prices but would do little to save refineries such as Marcus Hook. Most Canadian oil is too heavy to be processed there.
Crude oil prices soared back above $100 a barrel last year as the revolution in Libya halted production. The gains for crude outpaced the rise in petrol prices, which began to rally in earnest only after news of the latest refinery closures in the US and Europe. Petroplus, Europe’s largest independent refiner, filed for insolvency in January and has been lining up buyers for five plants.
Keeping a lid on refined fuel prices has been weak consumption. US petrol demand has fallen steadily since 2007 as cars became more fuel-efficient, fuel marketers blended more corn-based ethanol into their product and high unemployment kept highway travel light. This wedged refineries between high input costs and a poor appetite for their fuel. “The downstream industry is the flywheel in the oil system,” says Kevin Lindemer, an oil industry consultant. “Right now we’re seeing big changes on both sides of the flywheel.”
The US story is echoed throughout the west. Oil demand in Europe contracted by 320,000 b/d last year, the IEA says. Emerging-world demand more than offset these falls, led by countries that Barclays has nicknamed “Bics” – Brazil, India, China and Saudi Arabia. In the past five years their oil demand has grown by 5.1m b/d, while demand everywhere else has declined by 1.4m b/d, says Paul Horsnell, head of commodities research at the UK-based bank.
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