Crude oil price caught between Covid and green energy options

Prospects for global oil products markets this year are in flux, with major uncertainties surrounding the pace of vaccination program, rationalization in refining and the adoption of alternative fuels. Most forecasts for products demand and prices have been steadily revised upwards as vaccination programs have got underway and this has created positive market sentiment.

Argus' global head of oil products Stephen Jones told the forum held recently. Any actual demand recovery will depend on how quickly governments lift lockdown measures. One major unknown is how well the vaccines will deal with new variants of Covid-19.

In Europe, major oil products margins to the North Sea crude benchmark coalesced around $5/barrel by the end of January, according to Argus' European oil products editor Elliot Radley. This came in between a third and a half of their five-year averages.

A recovery toward pre-pandemic margin levels could be stimulated by lifting of lockdown measures and by major cuts to European production. Low margins have forced Europe's refiners to begin a phase of rationalization, and almost one million barrel per day of crude distillation capacity is either mothballed, shut down permanently or marked for various conversions to renewable-fuel processing.

European utilization has increased marginally since the second half of 2020, but remains close to 30-year lows, said Radley, with many refineries either offline or operating close to technical minimum rates. This reflects an oversupplied market, and oil product inventories are close to 30-year highs.

The third major uncertainty surrounding is how quickly environmental policies are adopted internationally, said Argus' head of European business development Josefine Ahlstrom. Argus Consulting — a division of Argus Media that provides forecasts and analyses separate and independent of Argus' news and price-assessment business — expects electric vehicles will make up 20% of the European vehicle fleet by 2030 and 50% by 2040. This could reduce gasoline demand by a third by 2030 as compared to 2019 levels.

Diesel demand is likely to be safer because commercial vehicles, which are more likely to retain internal combustion engines, make up a greater share of demand.

The EU's Renewable Energy Directive (RED) II calls for 14% of transport energy to be renewable by 2030, although this target could be increased as member states aim to meet ambitious greenhouse gas (GHG) emission targets. In the United States, the recent change of presidency could signal a revival of political momentum behind environmental legislation.

Overall, oil products demand is likely to fall slightly, and the share of renewables to increase rapidly.