How hard would global refiners be hit by a sharp drop in US gasoline demand?
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. 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 refiners ability to pivot from gasoline to distillates in response to the change in demand. 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. 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. Source: Wood Mackenzie