Required global refining utilization will be tighter in 2023 than in 2022, investment bank Piper Sandler (PSC) said, citing its global refining supply-demand model.
“If it wasn’t already clear in recent months, one of the takeaways from third-quarter refining earnings was that global tightness in refined product markets is likely to persist for quite some time. While we have consistently highlighted the outlook for “multi-year” sustainability of higher than ‘mid-cycle’ refining margins, we are officially increasing our 2023 outlook for refining margins to reflect what we see as an increasingly tight market,” PSC said in a research note.
In a base case, which accounts for 2023 supply additions and anticipated closures, and assumes the PSC Macro Research team’s base case on global demand (102.2 million b/d of global crude demand with moderate recession and sluggish China re-opening), PSC estimates a required global refining utilization of 83.4% in 2023 (vs. 82.5% in 2022 and 81% 10-year pre-pandemic average).
Even in a bear case (severe global recession and minimal Chinese recovery), PSC would expect annual utilization in 2023 to remain flat with 2022. As such, PSC sees global product inventories likely to remain well below long-term averages through 2023.
On the other hand, should China pivot to a more aggressive reopening (+600,000 b/d in 2023) and the European ban on Russian product imports materially reduce Russian refined product production (-1 million b/d of supply), required utilization could spike to over 84% in 2023.
Meantime, PSC said high European natural gas prices will likely continue to serve as a material relative advantage for US refiners for years to come, increasing US “mid-cycle” refining margins by up to $6.50/bbl at the current forward curve.
Crude differentials may continue to serve as a relative tailwind, particularly for complex refiners. PSC has increased its crude differential outlook for 2023 to better reflect current dynamics, raising its WTI-WCS forecast to $20/bbl from $16/bbl and Brent-WTI to $4.5/bbl from 3/bbl.