Oil Refiners Facing Profitability Drop to Multi-Year Lows: Analysis by Ahmad Ghaddar, Trixie Yap and Shariq Khan
In a recent development, oil refiners in Asia, Europe, and the United States are experiencing a significant decline in profitability, hitting multi-year lows. This downturn comes after a period of surging returns post-pandemic, highlighting the current slowdown in global demand.
The weakening profitability is a clear indication of soft consumer and industrial demand, especially in China, due to slowing economic growth and the increasing adoption of electric vehicles. The entry of new refineries in Africa, the Middle East, and Asia has further exacerbated the downward pressure on profitability.
Leading players in the industry, such as TotalEnergies and Glencore, enjoyed bumper profits in 2022 and 2023, capitalizing on supply shortages caused by various geopolitical factors and a strong demand recovery following the COVID-19 pandemic.
However, experts like Commodity Context analyst Rory Johnston suggest that the refining supercycle may be coming to an end, as new refineries catch up with slower fuel demand growth.
Key indicators such as Singapore refining profits and Asia's diesel margins have hit seasonal lows, reflecting the challenges faced by the industry. In China, weak economic conditions have led to a decline in industrial output and refinery production, further impacting fuel demand.
In the United States, the 3-2-1 crack spread, a measure of overall profitability, has dropped below previous levels, indicating a similar trend in the market. Gasoline and diesel margins have also witnessed a significant decline compared to previous years.
One of the main reasons for the margin weakness is the oversupply in the global diesel market, as demand for diesel and gasoil is projected to contract this year. This has put pressure on refining profits, with European diesel margins reaching their lowest levels in recent months.
Looking ahead, experts anticipate that refining profits will remain subdued, with some potential support from seasonal demand. However, the industry faces challenges from the start-up of new refineries, which have added to the existing capacity glut.
Overall, the outlook for the refining industry is challenging, with margin pressures likely to persist in the coming months. Companies are implementing measures to mitigate the impact of reduced refining margins, but the market remains uncertain.
Analysis by Vortexa's chief economist David Wech highlights the excess refining capacity relative to current demand levels, with new capacity further worsening the situation. Bank of America analysts also expect global refining margins to continue their downward trend, driven by increased capacity.