An increase in new oil refining capacity and a rise in production of fuel not processed at refineries will lead to more plant closures in 2014, the International Energy Agency (IEA) said in its latest monthly report.

Crude distillation capacity will increase by a net 1.1 million barrels per day (bpd) in 2013 and a further 1.2 million bpd in 2014, IEA forecast in its December Oil Market Report.

Refineries in Europe, in particular, have been hit hard by competition from plants in the United States and Asia, and although there were relatively few closures in 2013 compared with the previous year, 2014 looks to be challenging.

"While on the face of it, refinery capacity additions look in line with projected demand growth over 2013 and 2014, in practice an increasing share of demand is being met by supplies bypassing the refining system," the report said.

"As such, 2013 has seen simple margins plummet, and another round of refinery consolidation looks to be in the cards."

Much of the increased demand will be met by natural gas and biofuel, which typically does not go through the oil refining system, the IEA said.

"In 2014, natural gas liquids (for the most part not processed at refineries) will grow by 550,000 bpd," the report said.

"Biofuels will add another 60,000 bpd after expanding 120,000 bpd in 2013. Add in processing gains, and only 45 percent of projected demand will be sourced from refinery fuels."

WINTER SHORTAGE

The agency said a raft of new refineries being built in China in 2013 would be completed towards the end of the year, and so the impact would be felt in 2014.

The IEA cut its forecast for global refinery crude runs by 330,000 bpd for the fourth quarter of 2013 due to exceptionally low European throughputs and weaker-than-expected runs in non-OECD Asia and Latin America.

Refinery runs are likely to bounce in 2014, it said, jumping by 1.2 million bpd in the first quarter compared with the same period in 2013.

The IEA also warned that OECD countries this winter could face a shortage in heating oil supplies as middle distillates stocks are considerably lower than in recent years.

"In the event of prolonged cold weather and an associated surge in heating fuel demand, these inventories could be depleted rapidly," the IEA said.

In North America, "regional inventories appear tight covering 28.6 days of forward demand, 0.6 days less than 2012 and a significant 4.3 days below the five-year average," the report said.

In Europe, although inventories appear tight, high consumer stocks in Germany, the region's largest heating market, will provide a buffer for any large draws in the event of prolonged cold weather, the IEA said.

In Asia, middle distillates stocks lag the five-year average, covering 22.7 days of forward demand. – Reuters