COVERAGE AREA and macrothesis

In conjunction with its reopened review of light duty vehicle (LDV) fuel economy standards, we think the Trump Administration could freeze model (MY) 2022-2025 standards at MY 2021 levels. Doing so sets up conflict with California regulators, but our models nonetheless project U.S. gasoline consumption declines through at least 2025 thanks to a decade of efficiency gains. We believe the Environmental Protection Agency (EPA) is likely to maintain Renewable Fuels Standard (RFS) blending requirements near current levels, pushing the gasoline pool further past the E10 blend wall and putting upward pressure on RFS compliance costs. Extending biodiesel tax credits could offset some of those costs, but true RFS reform seems stuck in a zero-sum contest between pro-refining and pro-biofuels Senators. This year, those lawmakers may look beyond the confines of biofuels policy (e.g., to holds on Executive Branch nominees, the Farm Bill, etc.) as they jockey for leverage.

In the intermediate-to-long term, we see potentially underappreciated synergies between autonomous vehicles (AVs) and electric vehicle (EV) technologies that could significantly reduce oil consumption. Today, we see few policy roadblocks and numerous technology challenges for AV diffusion and limited EV appetites, putting fundamentally rosy prospects for refiners in the foreground. Refining margins benefited during 2017 from strong liquids demand and declining OECD refined products inventories. In 2017, our global indicator refining margin increased ~23% relative to prior-year levels. We expect incremental refined product demand to exceed refinery capacity growth in 2018. This could lower global spare refining capacity in 2018, our primary metric for projecting refining margins. Additionally, we expect U.S. mid-continent refiners to benefit in 2018 from wider Brent-WTI differentials than in recent years.

Our coverage provides clients with as-needed research notes, reports and flash blasts that consider growing tensions between yesterday’s policies and today’s market realities, including an examination of state-specific initiatives such as California’s Low Carbon Fuel Standard. In addition, our soon-to-be-released, new quarterly product, Themes, Trends and Discontinuities, will contextualize recent developments and outline our forward-looking projections of relevant economic and policy outcomes.

 Updated: January 8, 2018.