Oil refiners across Asia, Europe, and the United States are grappling with a sharp decline in profitability, hitting multi-year lows and signaling a significant downturn for an industry that had thrived in the post-pandemic economic recovery. Once buoyed by high demand and supply disruptions, refiners are now facing an oversupply of fuel and weakening global demand, particularly in China. This has left the industry struggling to maintain the robust margins it once enjoyed.
The profit slump is driven by several factors, including slowing demand for refined products, the growing market penetration of electric vehicles, and the introduction of new refining capacities across Africa, the Middle East, and Asia. These challenges are compounding, putting further pressure on an already struggling sector.
Post-Pandemic Boom to Bust
The oil refining industry experienced a boom in profitability following the COVID-19 pandemic, as global demand surged back and supply chains were disrupted by geopolitical events such as Russia’s invasion of Ukraine. Major refiners, including TotalEnergies, and trading firms like Glencore, saw substantial profits during this period, capitalizing on high fuel prices driven by supply shortages and increased consumer activity.
However, the so-called "refining supercycle" now appears to be coming to an end. Rory Johnston, an analyst at Commodity Context, observed, "It's certainly looking like the refining supercycle that we've experienced over the past few years may now be coming to an end, with supply from newly inaugurated refineries finally catching up with slower-growing fuel demand."
This shift has been stark, with profitability in key refining regions plummeting. In Asia, a critical market for global fuel demand, refining profits in Singapore—a benchmark for the region—fell to $1.63 per barrel on September 17, the lowest seasonal level since 2020. Additionally, diesel margins in Asia have hit a three-year low, reflecting the broader weakness across global markets.
China's Economic Slowdown and Soft Demand
A primary factor contributing to the decline in refining margins is the sluggish demand in China, the world’s largest oil importer. China’s economic growth has slowed in recent months, dragging down industrial output and oil consumption. Industrial output growth in China fell to a five-month low in August, while oil refinery output dropped for the fifth consecutive month. The combination of weak domestic fuel demand and poor export margins has forced Chinese refineries to scale back production, further contributing to the oversupply in global markets.
The situation in China is mirrored to some extent in the United States, where demand has also fallen short of expectations. In late August, the 3-2-1 crack spread, a key measure of refining profitability in the U.S., slipped below $15 per barrel for the first time since early 2021. This spread, which approximates the yield of two barrels of gasoline and one barrel of diesel from three barrels of crude oil, is a vital indicator for U.S. refiners. The decline signals a significant drop in profitability.
On the U.S. Gulf Coast, gasoline margins (excluding renewable fuel blending obligations) averaged just $4.65 per barrel as of September 13, compared to $15.78 a year ago. Diesel margins were similarly down, averaging just over $11 per barrel, compared to more than $40 in 2022.
Diesel Oversupply Adds Pressure
A key issue exacerbating the refining industry’s woes is the oversupply of diesel fuel, driven by weak global demand. The International Energy Agency (IEA) projects that diesel and gasoil demand will contract by 0.9% this year, averaging 28.3 million barrels per day (bpd). In contrast, demand for other refined products such as gasoline, jet fuel, liquefied petroleum gas (LPG), and fuel oil is expected to grow, albeit modestly.
In Europe, diesel margins have been hit particularly hard, falling to around $13 per barrel at the end of August, the lowest level since December 2021. Diesel margins in the region averaged $16.60 per barrel in August, less than half the $38.30 recorded during the same period in 2023. This drastic drop underscores the severe impact of oversupply in the market.
While the outlook for diesel margins remains bleak, analysts suggest that seasonal demand during the winter months could provide some relief. Raul Caldaria, an analyst at Energy Aspects, noted that refining profits are expected to remain low for the rest of the year, "with some upside from higher winter demand for diesel in Europe." However, this potential improvement is unlikely to reverse the broader downward trend.
Gasoline Margins Under Pressure
Refiners are not only grappling with weak diesel margins but are also facing declining profitability in gasoline production. In Europe, gasoline margins averaged $12.10 per barrel in August, a sharp drop of 61% compared to August 2023, when margins stood at $31 per barrel. Despite relatively strong demand, the oversupply of gasoline has weighed on margins, limiting refiners' ability to recover lost profits.
To cope with the deteriorating margins, refiners are being forced to implement cost-cutting measures and explore ways to mitigate the impact. A spokesperson for Italian refiner Eni confirmed that the company is "implementing measures to mitigate the reduction of refining margins" but declined to provide details on the specific steps being taken. Similarly, Spanish refiner Cepsa indicated that while it is monitoring profit margins closely, no decisions have been made regarding a reduction in processing activity.
New Refineries Add to Market Oversupply
Compounding the industry’s profitability challenges is the influx of new refining capacity coming online in various regions. New refineries, particularly in Africa, the Middle East, and Asia, are adding to the global supply glut, further pressuring margins for established players, especially older refineries in Europe.
This year has seen the startup of several large refineries, including Nigeria’s 650,000 bpd Dangote refinery, Mexico’s 340,000 bpd Dos Bocas refinery, Kuwait’s 615,000 bpd Al Zour refinery, and Oman’s 230,000 bpd Duqm refinery. The addition of these facilities has significantly increased global refining capacity, exacerbating the supply-demand imbalance in the market.
David Wech, chief economist at Vortexa, remarked, "Globally there is clearly too much refining capacity currently relative to demand levels, with new capacity just making things worse." Wech’s sentiment reflects the broader concern that the industry is now grappling with structural oversupply, which could keep margins depressed for the foreseeable future.
Analysts at Bank of America echoed this view, predicting that global refining margins will continue to decline. In a report published on September 13, the bank noted that refining margins had already fallen by 25% quarter-to-date and by 50% on a spot basis. With new refining capacity expected to rise by 1.5 million bpd year-on-year, the outlook for the industry remains challenging.
The oil refining industry, once buoyed by post-pandemic demand and supply disruptions, is now facing a harsh reality. Weak global demand, particularly in China and the U.S., coupled with an oversupply of refined products, has driven profitability to multi-year lows. The influx of new refining capacity is only adding to the pressure, creating a structural imbalance that could take years to resolve.
As refiners implement cost-cutting measures and adjust their strategies, the industry is bracing for a prolonged period of low margins. While seasonal demand fluctuations may offer some temporary relief, the broader outlook remains bleak, with analysts predicting that refining margins will stay depressed in the near term. For refiners, navigating this challenging landscape will require a delicate balance between managing costs, optimizing production, and preparing for a future where demand may never fully return to pre-pandemic levels.
(Source:www.marketscreener.com)
The profit slump is driven by several factors, including slowing demand for refined products, the growing market penetration of electric vehicles, and the introduction of new refining capacities across Africa, the Middle East, and Asia. These challenges are compounding, putting further pressure on an already struggling sector.
Post-Pandemic Boom to Bust
The oil refining industry experienced a boom in profitability following the COVID-19 pandemic, as global demand surged back and supply chains were disrupted by geopolitical events such as Russia’s invasion of Ukraine. Major refiners, including TotalEnergies, and trading firms like Glencore, saw substantial profits during this period, capitalizing on high fuel prices driven by supply shortages and increased consumer activity.
However, the so-called "refining supercycle" now appears to be coming to an end. Rory Johnston, an analyst at Commodity Context, observed, "It's certainly looking like the refining supercycle that we've experienced over the past few years may now be coming to an end, with supply from newly inaugurated refineries finally catching up with slower-growing fuel demand."
This shift has been stark, with profitability in key refining regions plummeting. In Asia, a critical market for global fuel demand, refining profits in Singapore—a benchmark for the region—fell to $1.63 per barrel on September 17, the lowest seasonal level since 2020. Additionally, diesel margins in Asia have hit a three-year low, reflecting the broader weakness across global markets.
China's Economic Slowdown and Soft Demand
A primary factor contributing to the decline in refining margins is the sluggish demand in China, the world’s largest oil importer. China’s economic growth has slowed in recent months, dragging down industrial output and oil consumption. Industrial output growth in China fell to a five-month low in August, while oil refinery output dropped for the fifth consecutive month. The combination of weak domestic fuel demand and poor export margins has forced Chinese refineries to scale back production, further contributing to the oversupply in global markets.
The situation in China is mirrored to some extent in the United States, where demand has also fallen short of expectations. In late August, the 3-2-1 crack spread, a key measure of refining profitability in the U.S., slipped below $15 per barrel for the first time since early 2021. This spread, which approximates the yield of two barrels of gasoline and one barrel of diesel from three barrels of crude oil, is a vital indicator for U.S. refiners. The decline signals a significant drop in profitability.
On the U.S. Gulf Coast, gasoline margins (excluding renewable fuel blending obligations) averaged just $4.65 per barrel as of September 13, compared to $15.78 a year ago. Diesel margins were similarly down, averaging just over $11 per barrel, compared to more than $40 in 2022.
Diesel Oversupply Adds Pressure
A key issue exacerbating the refining industry’s woes is the oversupply of diesel fuel, driven by weak global demand. The International Energy Agency (IEA) projects that diesel and gasoil demand will contract by 0.9% this year, averaging 28.3 million barrels per day (bpd). In contrast, demand for other refined products such as gasoline, jet fuel, liquefied petroleum gas (LPG), and fuel oil is expected to grow, albeit modestly.
In Europe, diesel margins have been hit particularly hard, falling to around $13 per barrel at the end of August, the lowest level since December 2021. Diesel margins in the region averaged $16.60 per barrel in August, less than half the $38.30 recorded during the same period in 2023. This drastic drop underscores the severe impact of oversupply in the market.
While the outlook for diesel margins remains bleak, analysts suggest that seasonal demand during the winter months could provide some relief. Raul Caldaria, an analyst at Energy Aspects, noted that refining profits are expected to remain low for the rest of the year, "with some upside from higher winter demand for diesel in Europe." However, this potential improvement is unlikely to reverse the broader downward trend.
Gasoline Margins Under Pressure
Refiners are not only grappling with weak diesel margins but are also facing declining profitability in gasoline production. In Europe, gasoline margins averaged $12.10 per barrel in August, a sharp drop of 61% compared to August 2023, when margins stood at $31 per barrel. Despite relatively strong demand, the oversupply of gasoline has weighed on margins, limiting refiners' ability to recover lost profits.
To cope with the deteriorating margins, refiners are being forced to implement cost-cutting measures and explore ways to mitigate the impact. A spokesperson for Italian refiner Eni confirmed that the company is "implementing measures to mitigate the reduction of refining margins" but declined to provide details on the specific steps being taken. Similarly, Spanish refiner Cepsa indicated that while it is monitoring profit margins closely, no decisions have been made regarding a reduction in processing activity.
New Refineries Add to Market Oversupply
Compounding the industry’s profitability challenges is the influx of new refining capacity coming online in various regions. New refineries, particularly in Africa, the Middle East, and Asia, are adding to the global supply glut, further pressuring margins for established players, especially older refineries in Europe.
This year has seen the startup of several large refineries, including Nigeria’s 650,000 bpd Dangote refinery, Mexico’s 340,000 bpd Dos Bocas refinery, Kuwait’s 615,000 bpd Al Zour refinery, and Oman’s 230,000 bpd Duqm refinery. The addition of these facilities has significantly increased global refining capacity, exacerbating the supply-demand imbalance in the market.
David Wech, chief economist at Vortexa, remarked, "Globally there is clearly too much refining capacity currently relative to demand levels, with new capacity just making things worse." Wech’s sentiment reflects the broader concern that the industry is now grappling with structural oversupply, which could keep margins depressed for the foreseeable future.
Analysts at Bank of America echoed this view, predicting that global refining margins will continue to decline. In a report published on September 13, the bank noted that refining margins had already fallen by 25% quarter-to-date and by 50% on a spot basis. With new refining capacity expected to rise by 1.5 million bpd year-on-year, the outlook for the industry remains challenging.
The oil refining industry, once buoyed by post-pandemic demand and supply disruptions, is now facing a harsh reality. Weak global demand, particularly in China and the U.S., coupled with an oversupply of refined products, has driven profitability to multi-year lows. The influx of new refining capacity is only adding to the pressure, creating a structural imbalance that could take years to resolve.
As refiners implement cost-cutting measures and adjust their strategies, the industry is bracing for a prolonged period of low margins. While seasonal demand fluctuations may offer some temporary relief, the broader outlook remains bleak, with analysts predicting that refining margins will stay depressed in the near term. For refiners, navigating this challenging landscape will require a delicate balance between managing costs, optimizing production, and preparing for a future where demand may never fully return to pre-pandemic levels.
(Source:www.marketscreener.com)
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