ASHEVILLE, N.C. —The factors shaping transportation fuel demand and supply have rapidly changed in only the past decade or so. And 2020 will see many of them playing out, for better or worse, said Tom Kloza, global head of energy analysis for Oil Price Information Service (OPIS), Gaithersburg, Md., at the 2019 CSP Outlook Leadership conference.
Here are six elements that will shape the fortunes of the fuel industry in the year ahead ...
The new consumers
About 10 years after the Great Recession, the global population has increased by 1 billion people, and another 1.5 billion people have entered the middle class.
“This is the rise of Southeast Asia, the rise of China, so many countries that lived lives of sustenance ... now are moving into the middle class and purchasing middle-class things, including fuel,” Kloza said. “Almost all the fuel growth over the last 10 years has been in the emerging economies. If emerging economies do well, we do well. If they sneeze, the rest of the world gets a cold.”
On the supply side, three actors are pulling the strings: the U.S, Russia and Saudi Arabia. The United States should hit 12.3 million barrels per day (bpd) in production, and probably 13 million bpd in the next year, barring a collapse in the price of crude, Kloza said. Most of this will be light, sweet crude from the shale oil fields. Lighter oil produces lighter-end products—think gasoline, naptha, butane and propane. Unfortunately, most refining profits today are in heavy crude, which can produce in-demand diesel and jet fuel.
“Right now, we are finding way too much light oil, yielding too much gasoline,” Kloza said. “Gasoline can become the unwanted hydrocarbon of the next decade.”
Saudi Arabia has a capacity of 12 million bpd but is not producing close to that number. The country, acting as the swing producer for the Organization of the Petroleum Exporting Countries (OPEC), has cut back so much on production to bolster prices that it and OPEC have the smallest share of the world oil market in a generation.
The 2020 presidential election
The winner of the 2020 presidential election will have some influence on gasoline consumption in the years ahead, but not as much as one may think.
The Trump administration is seeking to replace the tough Corporate Average Fuel Economy (CAFE) targets set under President Obama with the lower targets of the Safer Affordable Fuel-Efficiency (SAFE) Rule. “Make no mistake about it: Both of them cut back on gasoline consumption as you go forward,” said Kloza, who believes gasoline consumption will go no higher than 9.3 million bpd.
SAFE essentially freezes CAFE standards at model-year 2021 levels. This “doesn’t arrest demand curve, it just tempers the demand curve,” said Kloza, who expects a 400,000 to 700,000 bpd drop by 2025, at which point the demand decline picks up the pace.
New marine fuel standards
In January 2020, a new regulation from the United Nations' International Maritime Organization (IMO) will require container ships to switch from fuel with 35,000-parts-per-million (ppm) sulfur to 5,000 ppm. “It represents the single largest change in specification for a fuel probably since leaded gas,” said Kloza. It requires the sulfur content to be only one-seventh of the current level, he said.
While some analysts have warned of massive implications for diesel prices from the IMO 2020 standard, “So far, it is the dog that hasn’t barked,” Kloza said.
That said, once the regulation is fully implemented, it could have implications on diesel and gasoline. To make the lower-sulfur marine fuel, refiners will need to blend in lower-sulfur elements, such as 5-ppm on-road diesel. “Diesel prices can go really nuts,” Kloza said, citing prices $40 to $50 above the price of crude, which would result in higher prices for diesel—possibly $3.50 to $4 per gallon.
Meanwhile, any intermediate products that would have eventually been refined into gasoline may go straight into marine fuels.
“So you could have a lot less gasoline being made—not because of demand, not because of anything really related to supply capacity, but because that cut of the barrel will be going into the marine market if the marine market is high enough,” Kloza said.
The other sulfur regulation
Another specification rearing its head is Tier 3 Motor Vehicle Emission and Fuel Standards for sulfur content in gasoline, which will tighten in 2020. Three years ago, refiners had to produce gasoline that averaged 80 ppm of sulfur. By 2020, this average must drop to 10 ppm. Recent data from the U.S. Energy Information Administration (EIA) showed the 2018 average at 17 to 18 ppm.
“So we’re not there,” Kloza said. “What could happen in early 2020 is there is a lot of gasoline, but there’s not going to be a lot of gasoline that meets the sulfur averages they need for that year. It’ll probably limit some production.”
The octane equation
Refiners can lower sulfur content in gasoline to Tier 3 standards by processing the fuel through a catalytic reformer. But doing so lowers the fuel’s octane and creates “other unwanted guests” that need to be removed, Kloza said.
“We’re going to need octane in the next decade,” he said. One good source is E15, the 15% ethanol blend, which is higher octane than E10. The U.S. Environmental Protection Agency (EPA), with President Trump’s backing, approved E15 for year-round sale in May. The problem, Kloza said, is that branded supply contracts will likely act as a throttle on E15’s expansion.
“It just can’t happen when every major oil’s contract with their distributors says if you want to sell E15, you will have to sell over at the side of the store, with the junkyard dog,” Kloza quipped.