Oil and Gas Prices: Near-term Downside Year-End Upside

Downstream oil and gas industry players are used to market shifts. The key is taking advantage when they occur.

October 2015 | by Robert Harris

External market shifts are not new to the downstream oil and gas industry. Changes in environmental regulations, fluctuating natural gas prices, and the recent sharp decline in crude oil prices have caused ripple effects for downstream players. These external shifts can generate major new opportunities, but require refiners to be nimble and proactive as they re-optimize to the “new normal.”

Consider how incentives have altered in the US gasoline and distillate markets during the past decade. These markets traditionally were well balanced with relatively similar gasoline and diesel pricing, with only seasonal swings toward one or the other being at a premium. However, in the past five years, the market has seen a structural shift, with diesel now significantly and consistently out-pricing gasoline. This change is part of a global adjustment driven by two primary factors:

  • Accelerating diesel demand growth in developing markets. As global oil demand growth has shifted to developing economies in Asia and Latin America, it has biased growth toward distillates. Developing economies have a higher share of commercial (trucking demand), which tends to bias demand and demand growth toward diesel.
  • Decreasing gasoline demand in developed markets. In developed markets, demand has been declining in the light-duty passenger sector due to increasing vehicle efficiency (largely driven by stricter fuel efficiency regulations) and growing penetration of alternative fuels. These trends have disproportionately hit gasoline demand since it is traditionally favored in the light-duty vehicle sector. This structural shift has caused refineries to focus year-round on optimizing for diesel and jet-fuel production at the expense of gasoline and naphtha. In addition, capital projects that capitalize on this price spread—which may not have made sense five to ten years ago—could be highly profitable in this new distillate market.

“Time is money” as the market shifts: our experiences suggest that refineries that are able to react and optimize its production kit even two to three months faster than its peers can capture significant incremental margin (often $10+ million).

 

Executive Editor

 Ms Anna Sullivan

Ms Anna Sullivan