Commodities

Analysis: Global Gasoline Refining Margins Decline Amid Slow Summer Driving Season

By Shariq Khan, Mohi Narayan, and Ahmad Ghaddar

NEW YORK/NEW DELHI/LONDON – Oil refiners are experiencing reduced profits from gasoline sales as summer driving demand has not reached anticipated levels, despite many increasing production capacity.

The decline in gasoline demand has disrupted a trend of record profits for transportation fuel sales. In the United States, the largest gasoline market globally, refiners significantly increased output based on projected demand that ultimately did not materialize. According to government data, U.S. gasoline demand was 9 million barrels per day (bpd) in the first week of June, down 1.7% from the previous year and marking the lowest seasonally-adjusted figure since 2021.

Similarly, in Asia, the slump in gasoline markets has prompted refiners to scale back operations, and others worldwide may soon follow suit, potentially lowering global crude oil demand. A report from BMI, part of Fitch Solutions, noted the risk associated with refiners maintaining high output levels in light of declining profit margins.

Crude oil prices have decreased approximately 9% from a peak in mid-April, sitting around $83 a barrel, primarily due to concerns that the OPEC+ group may increase supply. Recently, OPEC+ indicated that a slow start to the summer driving season and lower margins were adversely affecting market sentiment.

Despite the drop in crude prices, the profitability of Asian refiners when producing gasoline from a barrel of Brent crude fell to about $4 per barrel in late May, a significant reduction attributed to a surplus of fuel supplies, as noted by analyst Priti Mehta from Wood Mackenzie.

Overall refining margins in Singapore dropped below $2 per barrel in May, compared to an average of $5 in the previous year. European gasoline refining margins fell to $10.80 a barrel by June 13, the lowest level since January 25. Additionally, the U.S. gasoline crack spread—the disparity between gasoline futures and crude oil costs—was recorded at under $22.50 a barrel for the first time since February.

In response to the market conditions, Taiwan’s Formosa Petrochemical Corp, a major refined products exporter in Asia, has announced plans to reduce its crude distillation unit run rates in June to 440,000 bpd, down from a previous target of 480,000 bpd.

A representative for Formosa indicated that increasing fuel flows from the Middle East to Asia, along with higher exports from India, were putting pressure on refining margins in the region, while asserting that demand in Asia remained healthy.

In the U.S., gasoline demand has been affected by various factors, including a rise in air travel over long-distance driving, the adoption of more fuel-efficient and electric vehicles, according to UBS analyst Giovanni Staunovo. Higher production from U.S. refineries, combined with tepid demand, has led to a rise in gasoline inventories by 5.7 million barrels since early April, reaching 233.5 million barrels by June 7, the highest figure for this period since 2021.

The U.S. refiners reduced their operating rates to 95% as of June 7, after previously operating at a one-year high of 95.4%. This was the first reduction in rates since April. Analysts believe further reductions may be necessary if demand does not improve.

Mizuho analyst Robert Yawger remarked on the potential for one of the weakest summers for U.S. gasoline demand in the post-COVID era, indicating that it would be unfeasible for refiners to maintain utilization rates at 95% under such conditions. The Energy Information Administration subsequently revised its 2023 U.S. gasoline consumption forecast downward to 8.89 million bpd from 8.91 million.

Although margins are expected to improve as gasoline prices typically increase during the summer months, Rabobank strategist Joe DeLaura cautioned that the market has been consistently underwhelming. Some support for margins may come from a slower-than-anticipated ramp-up of new facilities like Mexico’s Olmeca refinery, which is currently behind schedule and not producing commercially viable fuel. Similarly, the start-up of Nigeria’s Dangote refinery has been pushed back, with gasoline deliveries postponed until July.

The market continues to adjust to an overwhelming increase in supply from new refineries and expansions, resulting in augmented fuel exports from regions like the Middle East, India, and China. Data shows that gasoline exports from the Middle East have been at seasonal highs for the past six months.

Indian and Chinese refiners are capitalizing on discounted Russian oil, which is likely to keep pressure on Asian gasoline margins through the summer, according to Mehta. While gasoline crack spreads peaked in April at around $17.30 per barrel, expectations for significant strengthening through the summer remain low.

In May, Chinese gasoline exports rose by approximately 100,000 bpd from the previous month, reaching about 350,000 bpd, while Indian gasoline exports averaged 360,000 bpd, an increase of 50,000 bpd over the same period.

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