Commodities 2021: Global oil supply set for shake-up in 2021 as crude, refining squeeze resumes

London — Global oil demand is expected to rebound from the nadir of COVID-19 lockdowns in 2021 but the expected surge of Middle Eastern crudes and robust biofuel growth has implications for the global crude slate and refiners alike.

In order to feed the expected economic recovery but continue to squeeze top-heavy global stocks next year, OPEC+ looks poised for a gradual easing of its output curbs as it keeps a watchful eye on the impact from the rollout of COVID-19 vaccines on demand.

Global liquids supplies are expected to climb by 3.5 million b/d on average in 2021, according to S&P Global Platts Analytics, with almost all of the total coming from crudes pumped by the OPEC+ group led by Saudi Arabia and Russia.

Although dependent on hard-to-predict OPEC+ output policy, around 70% of crude supply growth could come from the Middle East next year as Saudi Arabia and other core OPEC producers add a combined 800,000 b/d to the market, Platts Analytics believes. By contrast outside OPEC, US production is expected to shrink by a further 1 million b/d on average over 2021 as pandemic drilling cutbacks feed through to higher decline rates.

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In addition to greater potential supply volatility due to disruptions in the Middle East, a growing dependence on Middle East crudes has implications for average global crude quality.

The supply rebound from OPEC means the tables will be turned on years of surging light sweet crude growth from US shale towards the medium sour crudes that predominate in the Middle East.

"Overall the liquids growth next year is going to be dominated by OPEC crude," Shin Kim, head of supply and production at Platts Analytics, said. "Light, sweet crude is barely growing at all in 2021... but watch for that medium, sour which will take a dominant role in growth for 2021."

The changing crude slate could help out refiners who have been paying higher prices for heavier, sour crudes which are the mainstay of their baseload grades.

More Middle Eastern crude could weaken sour crude prices and widen their discounts to sweet crude, which have narrowed recently helped by a buying spree from China.

Biofuels, NGLs growth

A return to wider differentials for heavier, sour crudes, however, will not be enough to reverse the fortunes of long-suffering Western refiners who have seen fuel demand sapped by the pandemic and are facing an acceleration of alternative fuels and a weaker oil demand outlook.

The International Energy Agency in October renewed warnings that refiners face a crisis over the growing divergence between refining capacity and demand for refined products. Their market share is being squeezed even further by a rising share of oil products bypassing the traditional refining system. This is coming from two angles; fast-growing biofuel supplies and petrochemical feedstocks which are mostly sourced from NGLs.

Driven by national fuel mandates, biofuel supplies are also expected to return to growth next year after a strong contraction in 2020 due to shrinking gasoline demand.

Demand for fuel ethanol and bio-mass based biodiesel is expected to rebound by more than 300,000 b/d next year and continue to outpace the demand growth for crude, according to Platts Analytics.

Supported by a higher policy focus on clean fuels in the wake of COVID-19, the IEA now sees biofuel output for transport reaching 186.1 billion liters, or 3.21 million b/d, in 2025, a 14% increase from 2019 levels. Globally, it sees biofuels meeting around 5.4% of road transport energy demand in 2025, from just under 4.8% in 2019.

After contracting by about 4% in 2020, next year could also be a staging post for NGLs, a key part of feedstocks for refiners and petchem plants which includes ethane, propane, butane, and natural gasoline.

Global NGL supplies, which are heavily dependent on US shale growth, are expected to flatline in 2021 before continuing outpacing crude growth, Platts Analytics estimates.

Under the IEA's central long-term oil forecasts, demand for crude will grow by 4% over the next decade to peak at 80.6 million b/d in 2030. Over the same period, however, NGL volumes will rise by 4% to reach 20 million b/d, or almost a fifth of the total liquids pool.

The return to strong NGL supply growth will add to a rising liquids pool from biomass, which means a shrinking market share for crude oil. Combined, NGL and biofuels demand will grow by over 3 million b/d in the next decade to 23.6 million b/d to make up 22% of global liquids, according to the IEA.

Bleak refining outlook

Oil demand destruction from the pandemic is being felt most acutely by refiners in the US and Europe who have seen margins tumble, and the rising volumes of biofuels and NGLs only add to the bleak outlook.

Expected refining capacity additions in the Middle East and Asia will outstrip the rebound in fuel demand next year. Platts Analytics estimates that growth in global refining demand for crude will average just 167,000 b/d a year over the next two years, down from the pre-COVID five-year average of more than 800,000 b/d growth per year.

"A continued influx of biofuels and NGLs supply will further weigh on crude runs in 2021," Platts Analytics said in a recent note "This will squeeze margins of existing refineries, particularly if the demand recovery for transportation fuels is sluggish, and refinery closures are inevitable."

Wood Mackenzie estimates that 1.4 million b/d of European refining capacity is under serious threat of closure by 2023. By then, regional refining margins are likely to hit a new low with 65% of plants suffering zero or negative net cash margins, the energy research group believes.

Dire margins and low utilization rates will likely continue to drive the current trend of US and European refiners to either convert existing refineries or start co-processing renewables diesel or HVO (hydrotreat vegetable oil) at their facilities. The pandemic has also intensified more focus on chemical recycling technologies which will dampen crude demand further and widen the gap between capacity and crude runs.

With rapid changes afoot in the global oil supply pool next year as the world emerges from COVID-19, it may be the acceleration of alternative, low-carbon fuel themes rather than the pace of the demand rebound which refiners remember most down the line.