Big merchant traders like Vitol, Trafigura, and Glencore are expected to aggressively explore opportunities to grow in order to diversify their asset and customer bases and mitigate risk.
Sharp growth in the downstream sector could simply shift the gigantic surplus of crude to the refined products market, undermining profit margins in all regions.
Snapping up refining capacity in the U.S. and elsewhere allows the Saudis to develop guaranteed outlets for its crude supply at a time the oil market is oversaturated and becoming more competitive.
The second quarter saw a remarkable plunge in refining margins, taking away the one source of comfort for the integrated oil majors.
Market conditions had been mostly kind to U.S. refiners over the past five years, but current oversupply of refined products, excess downstream capacity, and tight spreads between the two major benchmarks have considerably changed the outlook.
With China's economy slowing, India has stepped up as the world's main center of oil demand growth. This means its thirst for crude oil imports will continue to grow.
The oil majors reported very dismal numbers for the first quarter, but earnings exceeded market expectations largely because of earnings from their downstream units: Refining operations have allowed the large integrated oil companies to weather low oil prices much better than upstream E&P companies.
If oil prices do not rebound substantially, the oil majors will not be able to keep up such high levels of spending and still offer shareholders such generous dividends.
There's a clear opportunity for new downstream capacity in North Dakota, but intensely high capital costs, oil price volatility, complex regulatory hurdles, and the uncertain outlook for shale could derail refining projects in the state.
The diesel market is dealing with two major issues, one of which is a short-term glut and the other which surrounds questions about its long-term outlook in the wake of Volkswagen cheating on emissions testing.