Fara Group Market Perspective

Despite all the talk about ending hydrocarbon use in the EU, realizing this idea may be unlikely even by the target year of 2050. The COVID-19 recovery fund (formally called “Next Generation EU”) has three goals: [1] to help member-states recover from the crisis, [2] to kick-start the economy including by facilitating private investment and [3] to ascertain lessons particularly in the health sector. The second of these has direct implications for energy prices and energy trading in Europe and the East Mediterranean region. Of interest to the energy sector, it demonstrated the urgency in prioritizing reliable and affordable energy over futuristic, zero-emission technology investments.

With respect to the European market, the EU’s official Eurostat website states, “Despite decreasing production and fluctuating consumption through the years, crude oil and its derived products remain the largest contributors to energy consumption.” In 2018, the last year for which full statistics are available, gas oil and diesel oil accounted for nearly two-thirds of the EU’s final energy consumption of petroleum products. Motor gasoline represented another one-fifth. Kerosene-type jet fuel, fuel oil and all other oil products accounted for the remainder.

The European Green Deal adopted by the EU seeks discourage and decrease the use of fossil fuels and to ramp-up production of alternative energy fuels. Due to the difficulty of substituting other energy sources for unique petroleum products, the existing fuel consumption portfolio will, in fact, not change greatly in the foreseeable future. This situation naturally causes consternation in environmentalist circles. Over the last two decades, they have called for changing the existing fuel mix. They propose constructing offshore wind-turbine “farms” and propose to use the generated electricity to free hydrogen from water by electrolysis.

This “green hydrogen” would then reach end-consumers through existing natural-gas pipelines that will have been converted into hydrogen pipelines. The EU is caught in a bind where they want to switch over from hydrocarbon sources to hydrogen as much as possible as soon as possible, with 2030 and 2050 as milestone targets. But considering the technological and bureaucratic hurdles to realizing such a plan, it is still not clear whether the EU will really succeed in eliminating all oil and gas from total energy consumption, even by 2050 as projected.

Faragroup projects long-term demand for distillate products
What does this mean for specific distillate products? Very little, if anything. Let us take marine fuel as an example. Analysts at Faragroup see that demand is not decreasing; in fact it is still on the rise. As from 2014, demand for marine fuel in the EU was beginning to recover from the long-term decline after the 2008 global financial crisis but the COVID quarantine will obviously affect this. Fuel oil still represents three-quarters of such consumption, with gasoil accounting for the rest.

Despite COVID, on the global level, demand for marine fuel continues to rise. The impact of the new IMO2020 regulations, mandating decreased sulphur emissions, will not be immediate but will instead take many years, during which world demand will still continue to grow. These regulations will not have any dramatic impact on EU consumption of marine fuel, as the transition will take many years, while overall fuel-oil demand will continue still to grow.

European environmentalists are mainly criticizing Netherlands for now, but they will eventually turn their attention to others. Major fuel oil consumers in the EU include Eastern Europe and France, but also Germany despite its Energiewende (“energy transition”). Germany is in fact a very major fuel-oil consumer in the EU. Berlin’s spending on environmental goals will be constrained, however, by an innate fiscal conservatism compounded by the electorate’s antipathy toward higher energy bills (already amongst the highest in Europe). German environmental policy will change, but slower than anyone expects.