Wood Mackenzie has “balanced the world”, mapping the projected changes in crude trade, refinery utilisation/investment and refined product trade. This analysis has established that the biggest impact on the growth of US tight oil is in China.
The growth in China’s refining capacity is mismatched with global crude supply developments, such that proportion of light crudes processed increases by 5 percentage points, due to the limited availability of heavy, rather than medium crudes. There is a resultant drop in the yield of diesel gas oil from China’s refining system by effectively 2 percentage points between now and 2023.
Could the refinery yield shift cause a distillate shortage? In our base case, we simply don’t see it.
Although China’s diesel/gas oil yield falls, we still expect its exports of diesel/gas oil to continue to grow over the next five years reflecting the impact of ongoing investments.
Across Asia, refining investments result in the overall diesel/gas oil yield from the refining system staying at 33% of the total product supply.
European yields of diesel/gas oil remain broadly unchanged, as the growth in processing of US crudes is countered by the start up of the Johan Sverdrup field offshore Norway that provides a local supply of a heavier crude, along with the completion of various refinery upgrading projects currently underway.
Longer term, we are not expecting a distillate shortage as diesel/gas oil demand growth is projected to slow due to improving fuel efficiency and the onset of electrification of the commercial vehicle fleet.
However, a distillate shortage could emerge if the global environment differs from our base case through:
- Higher demand for gas oil in the bunker sector due to the forthcoming IMO regulations, over and above that made available from processing the surplus residue in spare residue upgrading;
- Sustained strong global economic growth resulting in greater call on commercial freight and heavy-duty trucking;
- Lower availability of heavy crudes through falls in supply from Venezuela and Iran that are not made up by crude oils of similar quality.
The most profound impact of US tight oil growth will be the potential to supply a surplus of gasoline.
The pressure on the refiners is to use their flexibility to shift yields towards diesel/gas oil. Only a dramatic change in the global product demand profile could challenge the ability of refiners to accommodate the growth of US tight oil supply.