Eric Watkins
OGJ Oil Diplomacy Editor
LOS ANGELES, Apr. 21 -- Analyst BMI says weaker demand for diesel in road transport use, gas oil for manufacturing and industrial applications, and falling jet fuel consumption have acted in concert "to pull the rug from under the middle distillates market."
Gasoline prices and margins earlier in the first quarter had made some progress. Since then, refiners have again struggled, BMI said.
"There is no clear pattern yet emerging for the oil products sector but, based on OPEC's efforts to limit crude supply, the downstream segment may be in for a tough time if crude prices rally but products demand remains weak," the analyst said.
"This is a recipe for ongoing margin weakness, and refiners are preparing themselves for the big squeeze," BMI said.
The start-up of new refineries in Asia and the Middle East will provide an ill-timed boost to global capacity that would lead to reduced plant utilization rates if demand remains weak, BMI noted.
Quick rebound unlikely
Lower fuel prices may stimulate demand in certain markets but the trend towards higher fuels taxation and the overhaul of subsidies in some developing countries mean that a near-term rebound is far from certain.
In spite of some evidence that US drivers are migrating back to less fuel-efficient vehicles, the major shifts in patterns of consumption resulting from vehicle ownership changes are unlikely to be reversed simply because pump prices are temporarily lower.
The move in Europe away from gasoline and towards diesel is expected to continue for a while, despite steep price differentials. However, advances in small gasoline engine technology may mean these more economical units could end the love affair with diesel.
Over the longer term, expansion of the refining system is still needed, particularly as market growth will likely accelerate as the world pulls clear of recession-depression. However, refining margins are likely to be under pressure for many months.
The downturn in refining profitability, coupled with weaker upstream economics and modest profits in fuels retailing, could cause international oil companies (IOCs) and national oil companies (NOCs) to reexamine investment plans.
Downstream capacity
The downstream oil market needs to see continued high-level spending in new crude distillation capacity, improved plant upgrading capability, and better storage and distribution logistics, BMI said.
Inevitably there will be reduced capital expenditure if industry earnings and cash flow remain under pressure. This can only result in the market tightening once again as demand picks up—with a return to extreme price volatility and generally higher fuel prices.
The continued weakness of refined product prices has played into the hands of those countries wishing to revise or abandon regulated systems. Many are seizing the opportunity and making sweeping changes that should bring prices more closely in line with the wider market.
This will have an appreciable impact on demand patterns over the medium-to-longer term, but the likely effects are difficult to assess at such an early stage.
In first-quarter 2009, BMI said the global wholesale price for premium unleaded gasoline was estimated at $50.63/bbl.
This compares with $56.37/bbl in fourth-quarter 2008 and, during the two quarters, the price has ranged from a monthly low of $40.38 in December 2008 to the February 2009 level of $53.29/bbl.
Gasoline downward trend
Gasoline prices in this year's first quarter are down 50.4% from $102.15/bbl in the equivalent period of 2008. For the second quarter, BMI is forecasting an average global gasoline price of $55.78/bbl, which represents a rise of 10.2% over the previous quarter, but a year-on-year decline of more than 56% from the impressive $127.92/bbl seen a year ago.
For the whole of 2009, the BMI assumption for gasoline is an average $56.89/bbl, with the price peaking at a forecast monthly average of $64.75 in December 2009. The overall year-on-year fall in 2009 gasoline prices is put at 44.1%.
Gas oil in the first quarter of 2009 averaged $56.83/bbl, based on a composite global price. This represents a year-on-year fall of 51% over first-quarter 2008, illustrating a slight relative weakening of diesel vs. gasoline.
During the second quarter, BMI's revised forecast is for global gasoil at an average $66.81, representing a quarter-on-quarter increase of 17.6%, but a 56.4% year-on-year decline.
Jet price declines
For 2009, BMI's forecast is for an average jet fuel price of $69.35/bbl, assuming a monthly high of $94.48/bbl in December. The full-year outturn represents a 42.8% fall from the 2008 level.
Jet prices averaged $58.93/bbl in the first quarter of this year, using the composite for New York, Singapore, and Rotterdam. The annual decrease was 50.4%, with jet matching the decline in gasoline prices.
The monthly low during the previous 6 months was $60.34/bbl in December 2008, with the price reaching $61.83/bbl in January.
Volatility has been low in the jet fuel market compared with gasoline and diesel. In second quarter, BMI assumes an average global jet price of $68.22/bbl, which represents a rise of 15.8% quarter to quarter and a year-on-year fall of 56.4%.
For 2009, the monthly average price is forecast to range from $53.75/bbl in February to $96.76/bbl in December, proving an annual level of $71.78/bbl. This compares with $124.95/bbl in 2008.
Naphtha was the weakest performer in 2008 among the major refined products, gaining 31% to $87.40/bbl during 2008. In the first quarter, naphtha averaged an estimated $42.91/bbl, compared with $93.70/bbl in first-quarter 2008 and $38.37 in fourth-quarter 2008.
The 2009 average naphtha price is put by BMI at $46.40/bbl, down 47% from the previous year's level.
Looking further ahead, BMI sees gasoline prices recovering to $63.45/bbl in 2010, rising further to $71.11/bbl in 2011 and stabilizing at around $76.58/bbl from 2012.
Gas oil is expected to rebound to $77.35 in 2010, reaching a plateau of $93.35/bbl from 2012. The price of jet is forecast to average $80.06/bbl in 2010 and $89.72/bbl in 2011, before leveling out at $96.62/bbl from 2012.
Contact Eric Watkins at [email protected].
