COVERAGE AREA and macrothesis

Our global indicator refining margin declined ~25% in CY 2018 relative to CY 2017 levels due to higher oil prices and lower demand growth. Our medium-term outlook for the global refining sector is of precarious prospects, given that distillation and conversion capacity are growing even as refineries cede global liquids demand share to biofuels and other fuels not produced by refineries. By CY 2023, these dynamics could result in a material increase in global spare distillation capacity, our primary metric for forecasting global refining margins. Complex refiners could benefit from higher demand for low sulfur marine fuels starting in CY 2020 due to pending International Maritime Organization regulations. That said, growing White House appetite to delay the sulfur rule could put this opportunity for U.S. refiners at modest risk, too.

We think the U.S. Environmental Protection Agency (EPA) is likely to continue raising Renewable Fuel Standard (RFS) blending requirements slightly above current levels to accommodate trend growth in cellulosic biofuels. We regard EPA’s posture on small refiner exemptions as a key driver of RFS compliance credit prices. The agency’s regulatory bid to ramp up E15 sales and change RFS credit trading rules also faces significant legal headwinds, in our view. Legislatively, durable RFS reforms appear to remain stuck in a zero-sum contest between pro-refining and pro-biofuels Senators.

We expect escalating CY 2019 conflict between Washington and Sacramento once the EPA finalizes its revised, light-duty vehicle (LDV) fuel economy standards for model years (MY) 2021-2026. The proposed option could increase U.S. gasoline demand (relative to its current flat-to-down trend) by ~500 kbbl/d in CY 2030. After a protracted legal battle, we think political vulnerabilities on both could result in a bargain that prorates that demand upside: California drivers may rebel against a state ban on larger, less-efficient cars; and President Donald Trump’s 2020 re-election bid depends on winning auto-intensive Michigan and Ohio. That could make the White House wary of forcing automakers into a Hobson’s choice between losing money by tooling up for two markets and losing money by selling fewer California-compliant cars nationwide. A final bargain could also expand electric vehicle (EV) multipliers despite White House opposition to the $7,500 EV tax credit.

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: December 24, 2018.