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IEA expects 'challenging' 2019 for oil refining industry

London — The global refining industry will face a "challenging" 2019, the International Energy Agency said in its latest monthly report Friday.

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The sector will have to absorb 2.6 million b/d of new capacity this year, "its largest annual increase since the 1970s". Further adding to the woes of the industry, some of the 2018 new capacity is only now "ramping up", "intensifying competition between established refineries."

However, despite the downside pressure on margins in December, caused by record high refining throughput of 84.2 million b/d, further out the prospects for margins are "not entirely clear," the report said.

The IEA expects a "significant rebound" in refined product demand this year, and should "accommodating crude prices" support refining margins, utilization rates will not fall. However, if "average crude prices continue moving higher for the third consecutive year" margins may shrink to levels that "force slowdown in some refining regions".

In 2018, the increase of the average Brent price by $16/b year on year meant the margin gains from 2017 were erased in the three key regional hubs, the report said.

New launches in 2018 and 2019 are also yet to start affecting the global industry.

Turkey's Star refiner "is yet to show up in throughput numbers, as the start-up has been somewhat slow," the IEA said.

The refinery will release its first products to the market in January, according to local media reports, with the refinery expected to reach full production capacity early in the New Year.

Separately, "Germany's refining activity is also recovering from a string of accidents last autumn," the IEA said. The country's Bayernoil refinery, which has been offline since a fire in the autumn, said it expects to restart in the spring. The IEA expects OECD Europe's refinery runs to grow by 180,000 b/d in 2019 after a 250,000 b/d fall in 2018.

Russian runs ramped up 130,000 b/d in 2018, in "the first annual increase since 2014," the IEA said, adding that, however, in 2019 "downstream taxation changes are expected to reverse" the 2018 gains.

Latin America registered its "largest" year-on-year decline at 600,000 b/d and the impact of the Latin American slowdown will last until Q4 2019, the IEA said. But "given that our 2019 number includes the impact of permanent closures in Trinidad and Jamaica, it is likely that Latin America has exhausted the potential for further declines in refining activity," the IEA said.

The IEA expects the Latin American slowdown to hold back non-OECD throughout growth in the first three quarters but in the last quarter of the year the agency expects throughput growth to be helped by new capacity ramping up.

"China and the Middle East remain the largest sources of incremental refining activity," the IEA said.

Iran is ramping up the new units at its Persian Gulf Star, the report said.

Iran's Persian Gulf Star is raising its gasoline output as part of the third phase, managing director of Persian Gulf Star refinery, said earlier this month. The refinery started its gasoline production operations in October 2018 and was aiming to stabilize operations in the following two months. The launch of the third phase of the Persian Gulf Star refinery will also bring diesel production on stream by March 20.

China's Zhejiang Petrochemical has planned to start trial operations this February on its crude distillation unit and vacuum distillation unit at the phase I project, a source close to the company said.

China's greenfield Hengli Refining and Chemical Co. in Dalian, northeastern Liaoning province, has started trial runs at its 400,000 b/d newly built refinery, the Shanghai-listed company said on its official WeChat network platform. Crude oil was fed into the refinery's No. 1 CDU and the unit started running in mid-December 2018. Meanwhile, Hengli is likely to start marketing its petrochemical and oil products in the first half of 2019.

POSSIBLE CLOSURES IN CHINA: WOODMAC

However, according to consultancy WoodMac, "high prices and volatility squeezed margins" for Chinese refineries while the independent "teapot" refiners have been additionally affected by a new taxation system that "raises input costs". "The teapots have struggled to sell, which in turn lowers utilisation affecting margins further," WoodMac said. The reduced competition has resulted in higher utilization and margins at state-owned refineries.

The consultancy expects that more stringent quality parameters being enforced in China this year and next for refined products, would require higher investment and upgrades that would "weed out inefficient plants" and could lead to a closure of 150,000 b/d of refining capacity by 2020.

--Elza Turner, elza.turner@spglobal.com

--Edited by Jonathan Dart, jonathan.dart@spglobal.com