Global Refiners Experience Profit Slump as New Plants Launch – Analysis by Reuters

By Ahmad Ghaddar, Trixie Yap, and Shariq Khan

LONDON/SINGAPORE/NEW YORK – Oil refiners across Asia, Europe, and the United States are experiencing a significant decline in profitability, reaching multi-year lows. This downturn marks a stark contrast to the increasing profits the industry enjoyed post-pandemic and highlights a broader slowdown in global demand.

The decline in profitability is largely attributable to weak consumer and industrial demand, particularly in China, which is grappling with slow economic growth and the rising adoption of electric vehicles. Additionally, new refineries coming online in regions such as Africa, the Middle East, and Asia have further contributed to the downward pressure.

Major refiners, including TotalEnergies, and trading firms like Glencore, had reaped substantial profits in 2022 and 2023 due to supply shortages stemming from geopolitical issues, including Russia’s invasion of Ukraine and disruptions in Red Sea navigation, paired with a significant recovery in demand following the COVID-19 pandemic.

"It’s becoming apparent that the refining supercycle we’ve experienced in recent years may be reaching its conclusion, as supply from newly opened refineries is finally aligning with the slow pace of fuel demand growth," noted Commodity Context analyst Rory Johnston.

In Singapore, a key indicator for Asian refining, profits hit $1.63 per barrel on September 17, marking a seasonal low not seen since 2020. Similarly, diesel margins in Asia plummeted to a three-year low on the same date.

The sluggish Chinese economy plays a pivotal role in this scenario, with industrial output growth in the country dropping to a five-month low in August. Refinery output in China has also declined for five consecutive months due to weak fuel demand and low export margins.

In the United States, where consumer demand has also fallen short of expectations, the 3-2-1 crack spread—a vital measure of profitability—dipped below $15 per barrel in late August for the first time since early 2021. This spread reflects the typical yield of U.S. refiners, producing two barrels of gasoline and one of diesel from three barrels of crude oil.

Gulf Coast gasoline margins, excluding obligations for renewable fuel blending, averaged $4.65 per barrel as of September 13, a dramatic decline from $15.78 a year prior, while diesel margins stood just above $11, down from over $40 the previous year.

DIESEL OVERSUPPLY

The global diesel market is facing oversupply due to weak demand, which is significantly impacting refining margins. The International Energy Agency predicts that diesel and gasoil demand this year will average 28.3 million barrels per day, reflecting a contraction of 0.9% compared to 2023, while demand for gasoline, jet fuel, LPG, and fuel oil is expected to increase over the same period.

By the end of August, European diesel margins fell to around $13 per barrel, the lowest level since December 2021, and averaged $16.6 per barrel in August, less than half of the $38.3 average from the same month in 2022.

The immediate outlook remains bleak, although seasonal demand might offer some support. Energy Aspects analyst Raul Caldaria anticipates that refining profits will stay low for the remainder of the year, albeit with potential benefits from increased winter diesel demand in Europe. Gasoline profit margins in Europe also faced pressure, averaging $12.1 per barrel in August, down 61% from $31 a year prior.

A representative for Eni indicated that the Italian refiner is taking steps to counteract the falling refining margins but did not divulge specifics. Meanwhile, a spokesperson for Spanish refiner Cepsa stated that they are keeping an eye on profit margins but have yet to decide on reducing processing operations.

NEW REFINERIES

The commissioning of several new refineries has exacerbated the strain on margins, particularly impacting older refineries in Europe. This month, Petroineos announced it would close its Grangemouth refinery in Scotland, with further shutdowns expected in Germany.

Some of the new refining capacities that began this year include Nigeria’s Dangote plant with a capacity of 650,000 bpd, Mexico’s Dos Bocas at 340,000 bpd, Kuwait’s Al Zour at 615,000 bpd, and Oman’s Duqm at 230,000 bpd.

"Globally, there’s evidently an oversupply of refining capacity relative to current demand levels, and the addition of new capacity is exacerbating the situation," stated Vortexa’s chief economist, David Wech.

Analysts from Bank of America have projected that global refining margins will likely continue to decline, having already dropped 25% quarter-to-date and 50% on a spot basis, coinciding with an anticipated year-on-year rise in refining capacity of 1.5 million bpd.