Disruptions to supplies of gasoline, diesel fuel, and light products, associated in part with changes in fuel quality standards, will keep oil markets tight and prices high during the next 2 years, Cambridge Energy Research Associates forecast in a report issued June 6.
“Incremental additions to refining capacity over the next 2 years [will] be insufficient to meet new global demand,” it predicts. For the short term, CERA expects the US industry to use “innovative” methods this summer to overcome logistical hurdles involving the switch to ethanol from methyl tertiary butyl ether (MTBE) in gasoline. More than 10% of gasoline volumes in some areas are affected.
If the US Environmental Protection Agency grants waivers already authorized by the administration of President George W. Bush for deliveries of nonreformulated gasoline to shortage-prone areas, supplies could be increased through imports as well.
CERA says it also expects US refiners to ramp up to full production as maintenance programs are complete and hurricane-damaged refineries come back on stream.
Nevertheless, such measures may not be enough to lower gasoline prices significantly this summer, CERA says, because of the “continued susceptibility of crude oil prices to geopolitically upward pressure” and because refining capacity additions will lag incremental demand growth, causing global refining tightness. CERA analysts expect global markets to remain tight “with exposure to potentially sharp price upswings-even in response to small, unexpected disruptions in refinery operations.”
Inventories of refined products are critical when markets are constrained by a lack of spare refining capacity, CERA notes. “Gasoline and distillate inventories in the US are not particularly flush, foreshadowing tight oil supplies this summer.”
Long-term scenario
Margins for light products are expected to remain well above historical averages during 2006-07, higher than even 2005’s soaring levels, for a number of reasons, CERA says, including:
- Rising wages, shortages of skilled labor, and inflation of costs for other key services and construction materials, such as iron, steel, and cement, are likely to raise costs and delay refinery expansions.
- Economic incentives for some refinery expansions may be stifled by the policies of China and several other developing countries, which are interfering with the market by initiating price controls on refined products and creating subsidies.
- Midwest refiners in the US, however, may upgrade facilities in deep conversion projects to refine extra-heavy crude from Western Canada as Canadian producers seek outlets for their crude and develop strategies to produce hydrogen to improve its quality.
- Proposed new heavy-oil refinery projects in the Middle East likely will go forward to ensure markets for national oil companies’ heavy crudes, meet growing demand for area transportation fuels, and reestablish an influence on global benchmark crude prices.
