Published on Tuesday, January 5 2021
Authors : Jonathan Leitch

We entered 2020 with the expectation of higher refining margins, driven by a continuation of strong global economic activity supplemented by an expected IMO boost to product margins and widening of heavy crude discounts. Instead, the COVID-19 pandemic quickly dashed those expectations, with the unprecedented drop in petroleum demand from the COVID-19 lockdowns and economic activity grinding to a halt. The result of this was companies scrambling to cut costs, defer capital investment plans, raise cash reserves and expand credit lines, and in some cases divesting assets or completely shutting down facilities. 

After these and many more trials of 2020, we look forward to 2021 with optimism that the worst is now behind us with the global economic recovery now underway and recent vaccine approvals bringing hope of putting an end to the pandemic. However, the path ahead is not going to be easy. In this blog, we look at some the obstacles that stand in the way of a smooth recovery from the turmoil of 2020 and highlight the key risks that the global oil markets will face this year.

Oil demand:

For oil demand in 2021, the only way is up following the steep decline that started in March last year. As governments tried to contain COVID-19 by reducing physical contact between people, the biggest impact on oil demand came from transportation fuels, particularly gasoline and jet fuel. We estimate that demand fell by just under 9 million barrels per day in 2020, by far the steepest annual decline on record. There was an especially steep drop in demand in March as hard lockdowns were implemented across the globe, but consumption has recovered since then, led by a particularly strong recovery in China.  We expect demand to continue to bounce back throughout 2021, leading to a record annual level of demand growth, although total global demand will remain lower than in 2019.

The rate of demand recovery this year will be governed by both the progress in the fight against the pandemic (influenced by the level of acquired immunity, vaccine distribution efforts and seasonal factors) and the related pace at which governments relax lockdown restrictions. In Europe for instance, rising hospitalizations due to a new variant of the virus have led to tighter lockdowns, restricting road traffic and air passenger movements. The rollout of vaccines has started slowly, and the pace will need to accelerate to have a substantive impact on Q1 demand. Other regions have fared better, and Asia remains the main source of support, with China now showing stronger demand year-on-year and the recovery in India gaining pace.

The risk to demand recovery comes from a slow rollout of vaccinations or from them being less effective than hoped. However, behind this comes the wider risk to economic growth resulting from the pandemic. Fiscal stimulus measures have helped to sustain global trade and support an uptrend in commodities including the run-up in crude prices in November and December last year. This support is expected to continue but the economic hangover from COVID-19 is huge and cutbacks or lower disposal income could hit consumer confidence and demand with the potential for increased civil unrest.

Longer term, oil demand growth will be undermined by environmental concerns and the cost of carbon emissions, along with growing supply of renewable fuels which meet demand outside of the crude oil and refining system.

Oil supply:

As crude demand in 2021 is expected to remain below 2019 levels, there will continue to be plenty of spare crude production capacity available. This should provide a ceiling as to how much further crude prices will rise. Russia has indicated that they are happy with prices in the $45 to $55 per barrel range and monthly meetings will consider how much extra supply OPEC+ members can add to the market without creating an unwanted stock build. However, there is the risk that their efforts could be undermined by extra production coming from Iran if there is a relaxation on sanctions under the new U.S. administration. There could also be an increase in exports from Venezuela for the same reasons, but this is less significant due to a variety of in-country issues which will limit the ability of production increases in that country.

In the near term, we do not expect a major bounce back in U.S. LTO production due to economic factors such as capital constraints and cautious behaviors by producers. This means that incremental crude supply in 2021 will mainly be of medium and heavy sour quality. As a result, crude differentials are likely to widen (although the magnitude is uncertain) and fuel oil cracks should weaken supporting crack spreads for lighter products.

In terms of risks that could cut production, the usual suspects remain, one of which could be Iran and Saudi Arabia continuing in their proxy wars in the Middle East, with risks to crude production, storage, and processing facilities as well as shipping in the Arabian Gulf. These risks could also threaten supplies from North and West Africa.

The prolonged period of low prices in 2020 has increased the risk of defaults and bankruptcies among smaller producers and mergers and acquisitions are expected to accelerate in 2021. Cutbacks are also driving an exodus of talent from the oil industry and this will have repercussions when demand recovers. There is also the risk that costs will increase in order to attract experienced workers back into the industry, and it will take time to train new skilled workers.


The introduction of new IMO fuel specification changes at the start of 2020 was expected to support middle distillate crack spreads and result in a good year for refiners. Instead, they have experienced one of their worst years as the sudden, deep plunge in demand drastically reduced margins. Refiners in Europe and the U.S. bore the brunt of the downturn, reflecting the declines in local demand for oil products. Initially, excess product was placed into storage but then run cuts were required and this developed into economic shutdowns and some permanent refinery closures.

The gap between available refining capacity and the amount needed to meet demand has narrowed since April but there is still an overhang of surplus capacity, meaning more closures will be needed in 2021.  Noncompetitive refineries in Europe and parts of developed Asia/Oceania will face the most pressure, while we believe only limited additional rationalization is needed in the U.S. Further closures will help refinery margins in the medium term but the shorter-term will be driven more by the operations of existing plants and the start-up of new capacity. New distillation capacity coming online in 2021 will likely run at high utilization rates once fully operational meaning that existing capacity in many cases will have to limit runs to make way for the additional output.

Because of these factors, refinery margins will be dependent not only on the level of demand recovery and capacity additions but also on how refiners respond to the recovery in products demand. As margins improve, the incentive will be to increase runs and restart closed capacity.  Discipline on the part of refiners to keep supply and demand in balance will be key and will in large part determine the level of sustainable margins.

Surplus stocks that built earlier in 2020 have been drawing down but will also limit the upside for margins. In terms of demand, jet fuel and gasoline have been affected the most and are likely to remain well below 2019 levels throughout 2021. This means that refiners will have to continue to minimize yields of both products even as they increase runs to meet more robust gasoil/diesel demand. However, there is limited flexibility, meaning that gasoline and jet are expected to remain surplus products.

Fuel oil crack spreads have been relatively strong as low utilization rates provide more spare conversion capacity. Downside for fuel oil cracks in 2021 comes from increased runs which result in higher production outright as well as higher yields per barrel processed. As mentioned, incremental crude supply will largely be from the Middle East and of medium heavy sour quality. This too will increase fuel oil yields and undermine crack spreads for residues, which will mean relatively weaker margins for less complex refineries and relatively stronger margins for hydrocracking and coking refineries.

Announced refinery closures so far have tended to be from oil majors who are looking to transition from carbon intensive activities to renewables energy and therefore those closures are not removing the weakest refineries in their local market, rather the weakest capacity in the owner’s portfolio. After the extended period of dire margins in 2020 and weak margins expected for 2021, cashflow may be a problem for smaller companies and independents, which could lead to distressed assets and bankruptcies.

Alternative sources of supply create a further risk for refiners. The conversion of some closed oil refineries to renewable fuels plants will add to supply capacity which is primarily being supported by government subsidies. As increasing demand is being met by growing supply of renewables, petroleum refining margins could remain challenged.

Similarly, supply of NGLs is expected to increase and this will displace some of the demand for petrochemical feedstocks such as LPG and naphtha that come from refineries, adding a further risk for margins.



The biggest risk to oil markets in 2021 remains COVID-19 with transport fuel demand heavily reliant on the efficacy and rollout of vaccines, and the pace of economic recovery driving oil demand and crude prices. Refiners face the challenge of continued weak demand and new capacity additions which means that run cuts and further closures will be needed, while market upheaval will provide further opportunities for traders and logistics companies. We remain hopeful that this year will be less traumatic than 2020 but also recognize that market participants will be faced with some big decisions as they try to recover and grow their businesses amidst continued uncertainty and risks.

TM&C will consider all of the issues discussed above and all other relevant factors in developing our supply, demand and price forecasts in the upcoming 2021 edition of our Crude and Refined Products Outlook (C&RPO), which will be issued in early February. If you would like more information on this publication or for any specific consulting engagements with which we may be able to assist, please visit our website: and send us a note under ‘Contact’ or give us a call at 214-754-0898. Wishing you all a Safe, Happy, Healthy, and Prosperous 2021.



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