In the current global market, oil refiners in Asia, Europe, and the United States are experiencing a significant drop in profitability to multi-year lows. This decline marks a downturn for an industry that had previously seen surging returns post-pandemic. The decrease in profitability highlights the slowdown in global demand, especially due to soft consumer and industrial demand in China, slowing economic growth, and the increasing penetration of electric vehicles. The recent addition of new refineries in Africa, the Middle East, and Asia has added further downward pressure on the industry.
Refiners such as TotalEnergies and trading firms like Glencore had seen significant profits in 2022 and 2023, benefiting from supply shortages caused by various geopolitical events. However, it appears that the refining ‘supercycle’ experienced over the past few years may be coming to an end as supply from newly inaugurated refineries catches up with slower-growing fuel demand. In Asia, Singapore refining profits dropped to a seasonal low, while Asia’s diesel margins crashed to a three-year low, indicating the challenging market conditions faced by refiners in the region.
The weak Chinese economy is a major factor contributing to the industry’s challenges, with industrial output growth and oil refinery output in China seeing declines. In the United States, the 3-2-1 crack spread, a key measure of overall profitability for refiners, slipped below $15 a barrel, indicating the tough market conditions in the region. Oversupply in the global diesel market due to soft demand has been a major factor leading to margin weakness for refiners worldwide.
Looking ahead, the immediate outlook for refining profits remains weak. However, seasonal demand, particularly in Europe during the winter, could provide some support. Energy analysts project refining profits to remain low for the rest of the year, but there could be some upside from higher winter demand for diesel in Europe. Gasoline profit margins are also under pressure in Europe, with average barrel prices crashing by 61% compared to the previous year, despite more robust demand.
The start-up of several new refineries has further compounded the pressure on margins, with older refineries, particularly in Europe, feeling the impact. Refiners like Eni and Cepsa are implementing measures to mitigate the reduction in refining margins, while some, like Petroineos, have confirmed refinery closures. Global refining capacity currently exceeds demand levels, with new refineries adding to the oversupply issue. Bank of America analysts expect global refining margins to continue their slump, with new refining capacity rising year-on-year, adding further challenges to the industry.
In conclusion, the refining industry is facing a challenging period with dropping profitability and weakening margins. The oversupply in the global diesel market, weakening demand, and the start-up of new refineries are all contributing to the current downturn. Refiners are implementing measures to counter the reduction in profitability, but the immediate outlook remains challenging. The industry will need to navigate these tough market conditions and adapt to the changing landscape to ride out the current downturn.
