McKinsey releases global downstream outlook to 2035

Perspective on global refining markets and projections to 2035

Higher supply of non-crude-based material, particularly from biofuels, will reduce the need for refining. (Image for illustration only)
Higher supply of non-crude-based material, particularly from biofuels, will reduce the need for refining. (Image for illustration only)

According to the outlook, the global refining market in 2018 saw significant capacity additions coincide with slower demand growth. Looking ahead, more global capacity is slated to be added in the near term, which will lead capacity to continue to outpace demand growth, as per the outlook. As a result, utilisation rates are poised to slip, predicts the outlook.

European utilisation rates should dip below 70% by 2023 due to declining demand and the region’s sensitivity to capacity additions in Africa, Asia, and the Middle East, says the outlook. While Asia’s long-term outlook remains strong, its utilisation rates will also dip in a similar fashion as Europe, to 73% by 2023, according to the outlook.

As per the outlook, after 2023, growing demand will lead Asia’s utilisation to steadily increase to over 80% by 2026 and higher after that. The US Gulf Coast’s unique market conditions – including refinery complexity, access to cheap natural gas, crude pricing at export parity, and strong demand for product exports – will cause utilisation rates to remain in the mid-80s for the foreseeable future, according to the outlook.

Strong production increases in the Americas and Middle East will offset falling production in Asia and Africa, leading global crude supply to grow at 0.2% per annum to 2035, says the outlook. Meanwhile, refining distillation capacity will grow by 1.2% per annum in the next four to five years, adding almost seven million barrels per day (MMb/d) of capacity, with most of the capacity additions in Asia and the Middle East, according to the outlook. However, higher supply of non-crude-based material, particularly from biofuels, will reduce the need for refining, and demand growth will slow from the current 1.2% per annum to 0.5% per annum until 2035, as per the outlook.

According to the outlook, global capacity additions show no sign of slowing down, leading to overcapacity in the near term and lower utilisation in Asia and Europe through 2024 as a result. Asia’s crude slate will become lighter as the region imports more light tight oil and replaces falling Russian and Asian crude supply with US and Middle Eastern crudes, says the outlook.

For increasing product flows, the majority will take place in Africa, South Asia, and Southeast Asia – fast-growing regions that rely on imports to meet product demand, predicts the outlook.

The outlook for prices and margins is deeply dependent on MARPOL regulations, which go into effect on 1 January 2020, according to the outlook. MARPOL will increase the light/heavy and diesel/gasoline differentials by $13 to $17 per barrel and $3 to $8 per barrel, respectively, in 2020. MARPOL will also push sweet crudes to be priced higher relative to sour crudes from 2020 to 2022, says the outlook. But after 2022, these premiums and discounts should transition back to historical levels, forecasts the outlook.

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