McKinsey lists 5 steps to save portfolio from long-term margin declines in oil refining market

Amid long-term margin declines in the global refining market, players must move quickly to adjust their portfolio strategies, said McKinsey & Company in a research report. The research house also believes that, between now and 2035, growth in global oil demand will slow to 0.5 percent per year. The few sectors with continuing demand growth will be those with poor fuel substitutes, such as aviation, or non-fuel end uses, such as petrochemicals.

Explaining the situation, McKinsey pointed out that despite the weakening outlook for global demand, refining capacity continues to grow. Global distillation capacity is expected to grow by 1.3 percent per year between 2019 and 2023, mostly as a result of greenfield additions in Asia and the Middle East.

Source: Report

In an attempt to capitalise on Asia’s strong oil demand, refiners are investing in large new refineries and expanding existing ones, particularly in China and Southeast Asia.

While the slowing growth in global demand continues, the expansion of refineries will cause global overcapacity to increase and utilization to decline. Among countries, Europe will see the greatest downside, with light product demand starting to fall in 2021 and with utilization hit by a strong wave of capacity additions in Africa, Asia, and the Middle East, the report added.

Source: Report

In order to create value from the downturn, the research house believes that the refiners should act now to reposition their portfolios’ strategically for the challenging decade ahead. The approach they take will vary depending on their nature, asset focus, and financial position.

More efficient assets can be restructured to shift refiners to the left-hand side of the cost curve.

Refiners with marginal assets should be looking out for the best approach and timing for the exit.

Any new project should be evaluated on short-and long-term market conditions.

As lengthening supply chains create a need for investment in logistics capacity, some players may see opportunities to diversify their assets or offerings.

Investors should be looking for opportunities in the margin cycle to acquire assets at a bargain price.