Feb-2025

Key things watch 2025

A review of the oil, refining, chemicals, and liquid renewables industries in 2024, highlighting the key things to monitor this year

Alan Gelder
Wood Mackenzie

Article Summary

The year 2024 marked a significant election period, with more than half of the world’s population involved in the democratic process. In many countries, the incumbents remained in power but with reduced mandates. Populism prevailed in some form. The run-up to the US election was particularly long, with the victory by former President Trump and the clean sweep by the Republican party offering the potential of 2025 being very different from 2024.

2024 had many events that impacted global energy markets, with the Houthi rebels attacking maritime traffic around the Red Sea, disrupting shipping, and an escalation of the Israel/Hamas conflict. The conflict in the Middle East widened as Israel confronted Hezbollah in Lebanon and exchanged missile attacks with Iran. The Russia/Ukraine conflict ground on, with no significant breakthrough by either side.

2024 in review
- Oil market
Global oil demand reached a new high in 2024, but the oil market has been plagued by concerns that demand was weaker than projected with a focus on potential over-supply, as OPEC+ withheld significant supplies throughout the year. Plans for OPEC+ to increase supply through the easing of voluntary cuts were delayed, as oil prices weakened during the year, particularly in the second half of 2024. Oil prices, however, spiked upwards in moderate surges during periods of high geopolitical tension, such as when Israel was threatening to attack Iran’s energy infrastructure. Oil prices fell quickly when tensions eased due to the ample spare capacity.

For 2024, oil demand growth has surpassed the increase in supply, with only a small gain in non-OPEC production for the year. That will change in 2025 when non-OPEC growth is equal to the projected increase in demand, which is another factor that weighed on oil prices late in 2024.

The concerns about demand centre on the forecasts for 2024 oil demand growth published by the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA), which have been unusually divergent, adding to the sense of confusion. Both organisations (and Wood Mackenzie) have been revising their demand growth projections downward as the year progressed. US inflation remained high, slowing the pace at which the US Federal Reserve could cut interest rates, delaying the shift to increased industrial production. China’s economy started 2024 reasonably strongly but weakened as the year progressed, with a weak housing market depressing a key sector in the Chinese economy. Europe continued to struggle with high energy costs, weak competitiveness, and low investment levels.

Despite these woes, oil prices did not collapse and only briefly flirted at levels below $70/bbl.

- Refining
Refining margins were back to five-year average levels at the end of 2023. The global composite margin reset to (or just below) the five-year average, as shown in Figure 1. For Europe, the regional reference margin is at pre-pandemic levels. This was despite the disruptions of the Russia/Ukraine conflict and the Red Sea, both of which make global inter-regional trade less efficient and more costly, which would support refining margins.

Refining margins returned to traditional norms, with competitively weak sites in both Europe and Asia suffering economic run cuts due to the low-margin environment.

These lower refining margins reflect several factors, with the key drivers being refinery capacity additions outpacing demand growth and several Very Large Crude Carriers (VLCCs) being cleaned and used to transport diesel/gasoil from the Middle East to Europe. This helped offset the impact of higher freight costs from vessels diverting around southern Africa. Refineries are complex to commission; however, facilities such as Dangote in Nigeria were successfully commissioned during the year, lowering the imports of gasoline to West Africa.

- Liquid renewables
The year 2024 was challenging for the economics of liquid renewables. Using US Renewable Volume Obligation (RVO) credit prices as a proxy for the health of the sector, the 2024 annual average price collapsed to just more than 50% of 2023 levels as the supply of renewable liquids grew strongly. This over-supply reflected a surge in capacity that was commissioned during 2024. Given that liquid renewables are predominately supplied as a blend component to road fuels, the combined 230,000 b/d decline in demand for diesel/gasoil across OECD Europe and the US, due to weak industrial production, exacerbated the supply overhang. This led to the harsh reality of numerous projects being cancelled, the most notable being Shell pausing its world-scale project in Rotterdam – a facility that was already under construction.

Liquid renewables are more expensive to produce than fossil fuels, so their growing adoption requires sustained and stable regulatory and policy support. Sweden provided a stark example of the risks of relying upon policy as the key pillar for an investment. Sweden’s regulation focuses on greenhouse gas reductions, and for diesel, its target percentage reduction has been tightening from 21% in 2020 to 30.5% in 2023. However, this dropped to 6% in 2024 due to the high retail cost of diesel and its contribution to the cost-of-living crisis felt by the Swedish electorate. Sweden’s diesel can now be largely delivered by blending with FAME, so there has been a marked drop in the need for renewable diesel, further weakening the economics of renewable diesel production in Europe.

- Commodity chemicals
The global olefins market continued its expansion in 2024, but the year marked a low point for ethylene capacity investments, as shown in Figure 2. Only 1.3 million tonnes per annum (Mtpa) of capacity was added in Asia, well below the 2020-2025 average of 8.7 Mtpa. In contrast, propylene capacity growth continued, primarily driven by propylene dehydrogenation (PDH) unit additions in China. PDH investments are expected to peak in 2024, reflecting poor margins.

Rationalisation efforts progressed in Europe and Asia, driven by overcapacity and sluggish demand growth. While European crackers maintained positive margins on average in 2024, significant closures have been announced for facilities in France, Italy, and the Netherlands. More closures are anticipated, given Europe’s high production cost and weak industrial activity. In China, Sinopec and PetroChina outlined plans to phase out smaller, uncompetitive crackers between 2025 and 2026.

Asia’s ethylene margins were negative due to overcapacity and weak economic growth. Conversely, US ethane crackers thrived based on their strong feedstock advantage.