Anomalies in the market
Going into the winter, global economies need more diesel, petrochemical feedstocks, etc. Refinery disinvestment in North America and Europe has led to serious energy concerns, like only a 25-day diesel oil supply in the U.S. transportation fuel market. Other concerns and supply chain disruptions involve potential gas shortages during the winter heating season if relatively mild weather turns into a severe winter.
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On a global scale, the IEA has revised up its 2022 forecast for global refinery runs to within 400,000 bpd of pre-Covid levels. In its latest Oil Market Report (OMR), the IEA said it expects global throughput to average 81.2mn bpd this year, up by 100,000 bpd from its previous forecast and 3.6mn bpd higher than last year.
However, refinery capacity shortages may not be resolved any time soon due to government policies to ban upstream oil and gas production (frack ban) in the U.S. and elsewhere limiting the availability of crude feedstocks, particularly higher quality crides (i.e., higher API and low sulphur shale crudes). Moreover, refining organization’s hesitation to resolve the prolonged up-cycle in refining capacity, regardless of $49+ crack spreads, is heavily influenced by ESG demands. Why invest if government regulators attack high ROI’s?
There are some limited opportunities to repurpose and reinvest in shuttered refining sites towards much lower capacity renewable diesel units, chemical recycling (from plastic waste derived pyrolysis oil), and polymers. Elsewhere, with demand for conventional transportation fuels expected to exceed pre-Covid levels in 2023, capital investment continues pouring into refinery projects in India, China and the Middle East, as discussed at PTQ and Digital Refining’s recently sponsored Refining India 2022 conference in New Delhi.
If other industries are to expand, refinery product output must increase. For example, the mining industry’s capital expenditure was expected to rise by 22% across leading mining corporations in 2022, so it stands to reason that increased mining activity in 2023 and beyond predicates additional diesel demand for the heavy machinery used in the extraction of iron ore, copper, uranium, vanadium, and the precious metals needed for the growing electric vehicle fleet.
It seems oxymoronic that in the early stages of decarbonisation towards global net-zero emissions, more diesel and other distillates will be needed until emerging fuel sources like CO2-to-methanol, green hydrogen and fuel cells can achieve commercial scale, if ever.
We are under no illusion as to the accuracy of the timelines when these emerging fuels, along with associated infrastructure could become mainstream. But the investment incentives are compelling because hydrogen fuel cell–powered vehicles travel longer distances using less energy than refinery produced diesel or gasoline.
According to U.S. DOE researchers, one kg of hydrogen contains about the same energy as a gallon of gasoline. Today, a fuel-cell electric vehicle with 1 kg of hydrogen can drive approximately 60 miles, compared to conventional vehicles, which get about 25 miles on a gallon of gasoline. With continued technology improvement, the DOE is working to increase that fuel efficiency up to nearly 100 miles on 1 kg of hydrogen. The U.S. DOE’s ‘Hydrogen Shot’ aims to reduce the cost of clean hydrogen to $1/kg within one decade to make hydrogen more accessible and affordable.
But for now, conventional refinery produced diesel tops the shortage agenda. Unfortunately for some markets like North America, distillate inventories are at the lowest level for this time of the year since the EIA started collecting weekly data in 1982, at 106 million barrels. The EIA expects diesel prices will have a massive upside in the winter months unless rates of diesel consumption decline.
Even though the transition to LNG/natural gas-powered machinery is accelerating, nearly every industry relies on diesel to power standby electric generators for unreliable grids in Africa, South America and elsewhere. For example, the global agricultural industry needs diesel to power machinery for off-grid/remote power, crop harvesting, powering irrigation, etc.
The same paradigm applies to other industries like steel, construction, and the military. Beyond anomalies, the world’s militaries still don’t have low-carbon emissions fighting vehicles. Perhaps the Ukrainian conflict can be stopped until zero-emissions battle tanks become available.
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