How hard would global refiners be hit by a sharp drop in US gasoline demand?

Modelling a lower demand scenario

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Mark Broadbent

Research Director, North America Oils

Mark leads our North America oils team in analysing crude and product markets.

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A recent International Energy Agency (IEA) study suggests global gasoline demand peaked for good in 2019, thanks to the Covid-19-induced downturn, gathering momentum behind the energy transition and surging demand for electric vehicles. This is clearly bad news for refiners, as gasoline is one of their main cash crops. But how bad could it be, exactly?

We explored such a scenario – one view of the future of oil and gas – using our Refinery Supply Model (RSM), a proprietary model that enables the rapid calculation of optimal economics for the global refining industry.

The RSM calculates the cost of buying, shipping and converting crude to products, as well as moving that product to demand centres. It then identifies the lowest-cost way of satisfying global demand by adjusting crude trade flows, refinery utilisation and yield, as well as the resultant product trade flows. This gives us a clear picture of the optimal results in response to major changes in key inputs, such as US gasoline demand.

To gauge the impact of a decrease in demand for gasoline, we modelled a case in which US gasoline demand is lower than our base forecast by 1 million barrels per day (b/d) in 2025. We came to the following conclusions:

  • US gasoline demand decreases are a higher risk for refiners in Europe than in North America.
  • The pain of lower margins will be widespread, even for regions where utilisation remains unchanged.
  • The magnitude of the earnings loss will hinge on a refiner’s ability to pivot from gasoline to distillates in response to the change in demand.

We present the full results of our model in US demand – who loses if it’s lower? Fill in the form to receive a complimentary copy of the full report or read on for an introduction to some of the key themes.

US impacts of this lower gasoline demand scenario

The resilience and competitiveness of US refining means that the decline in run rates is only about a quarter of the decline in demand. PADD III (Gulf Coast) cuts deepest, Midwest refiners hold steady and the West Coast sees a sizeable drop. While Midwest refiners keep running hard, however, their margin sees the greatest squeeze of all regions globally.

Domestic trade (or inter-PADD movement) drops by around 375,000 b/d of total product. Part of that comes from the reduction in production, while the remaining barrels are split between additional product exports to Europe and Latin America.

For more information on what the decline in US demand in this scenario means for the Atlantic Basin and the rest of the world, fill in the form to access the full report.

Yield shifts and price drops

The model allows refiners to shift yields to produce the best economic option for each refinery in the context of global optimisation. The results indicate more flexibility to reduce gasoline production in North America than Europe. Latin American yields also shift, increasing for both gasoline and distillates. More competitive refiners in Latin America respond to lower US Gulf Coast feedstock demand by reducing their production of residues and vacuum gas oil (VGO), while weaker refiners simply cut runs.

Because of strong competitive position of US Gulf Coast refiners, the US drop in gasoline demand is felt across the world as exports from the region grow. Those barrels must push into more distant and lower-value export markets to find a home. The yield shifts spread the price impact of demand destruction from gasoline to diesel, jet and gasoil, as refiners shift yields to maximise margins.

What would this mean for margins globally? Fill in the form at the top of the page for a complimentary copy of our report, with accompanying charts.