Barron's (Online); New York. 21 Sep 2023.
Refining stocks have risen this year , boosted by growing demand for gasoline and diesel and a relative shortage of those products around the world. But next year could be a different story.
Two long-delayed refineries outside the U.S. are set to ramp up production, pumping out about 1 million more barrels a day of fuel.
Large new refineries in Mexico and Nigeria are ready to start producing fuel after a long start-up process that had left Wall Street skeptical that they'd open soon.
"These two refineries, which have been hit by major delays and cost overruns, appear within reach of the finish line," writes Tudor Pickering Holt analyst Matthew Blair.
Added capacity could slow or reverse the gains of refining stocks. The VanEck Oil Refiners ETF (ticker: CRAK) is up 16% this year, and some stocks have performed even better. Valero Energy (VLO) stock is up 23%, for instance. Added capacity could also weigh on gasoline prices, as it would add to global supplies of gasoline.
The new Nigerian refinery was built by Dangote Group, a conglomerate that is mostly privately held. It has already started up some production, and is on track to produce 650,000 barrels worth of oil products by November, including gasoline, diesel, and jet fuel, according to Blair.
The Mexican refinery is owned by the state oil company, Petróleos Mexicanos, or Pemex, and is set to produce 340,000 barrels of fuel by the end of the year, about half of which will be gasoline, Blair wrote.
Total global refining capacity is technically about 100 million barrels a day, though about 20% of that capacity is offline or not usable, according to the International Energy Agency. The additional refining capacity of about 1 million barrels will be a significant addition to the 83 million barrels of oil products being pumped out today. Those two refineries alone would add more capacity than the average year from 2015 to 2019, when about 800,000 barrels of new capacity was added each year, Blair notes.
In general, refinery capacity growth has stalled. During the pandemic, some refineries closed because they could not operate profitably. In 2021, net global capacity fell for the first time in 30 years. U.S. capacity remains below 2020 levels of 19 million barrels a day, but it has risen part of the way back this year to 18.3 million barrels because of an expansion at an Exxon Mobil (XOM) refinery. There haven't been big new refineries built in the U.S. in decades .
The new capacity in Nigeria and Mexico could hurt existing oil refiners—even the ones in the U.S.—by forcing margins down, because oil is a global market. Nigeria has been importing more than 400,000 barrels of gasoline a day from other countries, because of a lack of domestic refining capacity. The new refinery should allow it to reduce those imports to about 200,000 barrels or fewer by 2025, according to S&P Global . Overseas refineries that had shipped fuel to Nigeria will see lower demand.
Overall, Blair expects cracks, a measurement of margins used for refiners, to fall to $12 per barrel for gasoline and $28 for diesel in 2024, versus $19 and $32 this year.
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Credit: By Avi Salzman