Oil prices have remained range-bound for the past several weeks, with the market in limbo as another COVID wave looms.The downstream industry has been affected particularly severely by the unique combination of events that unfolded this year. On the one hand, the coronavirus pandemic decimated demand for their products, and on the other, OPEC+ reduced production, raising prices. What is more, refined oil products have stayed off oil buyers’ radar. Refiners just got a tiny respite from oil buyers, though, according to Reuters’ John Kemp. He noted in his latest column that hedge funds and other institutional oil buyers had turned their sights towards fuels last week, buying some 20 million barrels of U.S. gasoline and diesel, and European gasoil. 

Unfortunately, this respite is nowhere near enough to make refiners’ lives better. New flares of infection around the world have prompted several countries to reintroduce travel restriction measures just weeks after they were lifted, spelling trouble for transport demand. 

And whatever spells trouble for transport spells double trouble for refiners.

The danger of a second wave has already weighed on crude oil prices. Ordinarily, this would be a positive development for refiners, but the tables have turned now that low prices are coming from expectations of lower demand for refined products. The silver lining, such as it is, is that a second wave of infections may not affect oil demand as much as the first one did—at least according to Rystad Energy.

At the same time, different fuels are recovering differently in terms of demand. Gasoline demand, for instance, has shown some signs of recovery after lockdowns were lifted around the world. This recovery, however, has been moving unevenly. The Energy Information Administration has been reporting both inventory builds and draws in gasoline stockpiles over the weeks following the lifting of lockdowns, noting these are still above the five-year average for the season.

 

Distillate fuels have been slower to recover, chiefly because of the decimated demand for air travel and hence jet fuel, for which distillates serve as feedstock. In fact, in many cases, refiners were forced to use the distillates that are typically turned into jet fuel into diesel fuel, pushing up diesel inventories while demand remained weak.

The outlook for jet fuel is bleak. 

Analysts from Bank of America said earlier this week that they did not expect jet fuel demand to fully recover until 2023. According to the BofA analysts, the third quarter of next year will be the first signs of jet fuel demand rebound. It will then take another two years for it to reach pre-crisis levels of 8 million bpd—if ever—because while they wait for demand for air travel to recover, some airlines could go under.

In more bad news for the refining industry, the world’s largest oil importer, which reported record run rates after the end of the lockdown in China, is now cutting these run rates because of a fuel glut. This glut would likely have happened even without a pandemic: Chinese refiners have been adding refining capacity too quickly, saturating the Asian market and affecting refinery margins.

All in all, refiners need all the help they can get right now. They are unlikely to get it, however, as the world hunkers down in preparation for a second wave of Covid-19. This second wave will likely delay further the rebound in oil demand and in transport, which would, in turn, delay the rebound in refining margins, putting some refineries out of business.

Nevertheless, according to Wood Mackenzie analysts, over the long term, the downstream sector will require investments in new capacity, at least in some regions such as Asia and the Middle East, where demand for oil is expected to grow. It seems the near to medium term is problematic, but the long-term outlook for the downstream sector is quite positive.