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Every new barrel of refining capacity anywhere in the world is good for trucking. Even the construction of a whopping new refinery in places like Malaysia and India can put downward pressure on global product prices, which tend to get normalized around the world because of the ability to put gasoline, diesel and other products on the water and smooth out imbalances. 

According to two recent reports, the current trend in adding new barrels of capacity is one that favors those consumers.

One of the reports, from the engineering firm of Turner Mason, talks about the capacity growth in recent years and over the next few years around the world. The second, written by Morningstar analyst Sandy Felden (whose work we discussed last week, also on an issue of added refining capacity), talks about a niche product aimed right at a market important to trucking: renewable diesel.

Renewable diesel is not the same thing as biodiesel. Both are made from similar feedstocks, like soybeans. But the process that turns the feedstock into a fuel is different for renewable diesel than biodiesel. 

Biodiesel production is a simpler process that makes a product that can be blended into diesel, but with limits. Renewable diesel goes through a treatment process at a refinery that makes it identical to diesel.

The result? “Renewable diesel is chemically like petroleum diesel and nearly identical in its performance characteristics,” Fielden wrote in the Morningstar report. “It can be dropped into petroleum diesel at high blending levels without affecting quality.” By contrast, biodiesel can only be blended into diesel at a 5% to 20% rate.

The report also notes that renewable diesel can be “co-processed” with petroleum diesel at refineries. Biodiesel generally is produced at a separate facility that is often stand-alone, so must be transported for blending.

It’s important to note that the relative magnitude of renewable diesel and biodiesel can best be seen in the size of the plants that produce the two products. Refinery capacities are measured in the hundreds of thousands of barrels per day. Renewable diesel plants, which generally are larger than biodiesel facilities, are measured by millions of gallons per year. But even though the percentage is small, there still are important trends favoring the growth of renewable diesel.

One of them is IMO 2020. The new rule limiting sulfur content in marine fuels is going to be met in part through the use of an existing product called marine gasoil, which is a diesel product, or through a product called very low sulfur fuel oil, which is produced by blending a diesel-like intermediate product called vacuum gasoil. But either of those can benefit from the supply of more renewable diesel. Both approaches “increase demand for low-sulfur renewable diesel,” the report said.

Renewable diesel has government support also coming nationally from the U.S. Renewable Fuel Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS). The former requires fuel suppliers to meet minimum targets of fuel production using renewable sources. The second is a California-specific law (though Oregon has an LCFS and the state of Washington is moving that way) that seeks to reduce the carbon intensity of fuels. The LCFS differs from the renewable fuel standard in that the RFS counts all gallons of renewable fuels as largely equal. The LCFS gives larger credit to those fuels with lower carbon intensity. (For example, ethanol produced through coal-generated electricity gets a higher carbon intensity than ethanol that comes from a plant powered by natural gas-fueled electricity).

The LCFS could be a reason why on a list of 10 new plants planned for the U.S. through 2024 listed by Morningstar, five of them are well-positioned to serve the California and West Coast market. (One each in Washington, Oregon and California and two in Nevada.) The total capacity is 2.3 billion gallons per year, which works out to about 150,000 b/d. Total U.S. distillate consumption, according to the Energy Information Administration, is about 3.9 million b/d, a figure that does not include jet kero consumption where biofuel consumption is minuscule. That means the new plants will add supply equal to about 3.8% of current consumption.

The rush to add this capacity is driven not just by demand but by the fact that the production of renewable diesel (and biodiesel) produces credits under the RFS and in California, that state’s LCFS. Those credits can then be sold to refiners or wholesalers that need them to meet their own obligations under those rules. “Renewable diesel offers high margins when RIN sales and LCFS credits are added, and we expect tight supply to continue pushing up values as carbon regulation and IMO needs increase demand for low-sulfur diesel,” Fielden writes.

The capacity at conventional refineries worldwide is getting a boost but for different reasons than renewable diesel, Turner Mason writes. In a blog post published to highlight the latest release of its Worldwide Refinery Construction Outlook, Turner Mason notes that refinery  construction tends to be cyclical, with years of strong refining margins spurring announcements of new projects. But many of those don’t get off the ground, a petroleum version of “vaporware.” Turner Mason deals with the “vaporware” issue by going over the list of announced projects one-by-one and cutting it down to projects likely to actually be built.

There was significant growth in actual new capacity in the first part of this decade, a direct consequence of the “golden age” of refining several years earlier, Turner Mason writes. 

New refinery capacity added in 2017 was about 800,000 barrels/day, less than the growth in world oil consumption. Refinery capacity additions in 2018 were about 1.25 million b/d, a bit more than the global growth in petroleum consumption estimated by the International Energy Agency.

But 2019 is a big year for refinery additions, coming in at more than 2.4 million b/d, Turner Mason said. The IEA’s estimated growth in consumption this year is about 1 million b/d. 

All of this is good news for petroleum consumers. More capacity works to push down product prices. 

One wild card is how many refineries will close. Turner Mason does not forecast refinery closures which as they note, “are generally announced with no lead time.” (Exhibit A: the Philadelphia Energy Solutions refinery earlier this year following an explosion). Adding to the mix of refinery closure uncertainty this year is IMO 2020, and the fact that refiners that aren’t particularly complex and make a lot of heavy fuel oil could find themselves with a significantly smaller market and a big tab to be able to compete. Closing might be the best alternative. 

“The level of refinery shutdowns in recent years has been relatively low but (is) expected to increase with the implementation of the new IMO bunker regulations in January of 2020,” the Turner Mason report said.