LONDON/SINGAPORE/NEW YORK, Sept 20 (Askume) – Refinery profitability in Asia, Europe and the United States is facing multi-year lows, signalling a slowdown in an industry that has been badly hit since the pandemic struck, underlining the extent of the current slump in global demand.
The weakness is another sign of softening consumer and industrial demand, especially in China, as economic growth slows and electric vehicle adoption rises. The commissioning of new refineries in Africa, the Middle East and Asia added to the downward pressure.
Refiners such as TotalEnergies and trading firms such as Glencore expect to make huge profits in 2022 and 2023 as they grapple with supply shortages caused by Russia’s invasion of Ukraine, disruptions to Red Sea navigation by Houthi rebels and a substantial recovery in COVID-19 demand following the pandemic.
“The refining supercycle we have experienced over the last few years appears to be coming to an end as supply from new refineries finally begins to slow,” said Commodity Context analyst Rory Johnston.
On September 17, Singapore’s refining profits, an Asian benchmark, fell to US$1.63 a barrel, a seasonal low since the same period in 2020. On the same day, Asian diesel margins fell to a three-year low, London Stock Exchange data showed.
China’s economic weakness is a major reason for this. Industrial production growth in the world’s top oil importer fell to a five-month low, while refinery output fell for a fifth consecutive month due to weak fuel demand and low export margins.
In top consumer country the United States, where demand is also weaker than expected, the 3-2-1 crack spread, a key measure of overall profitability, fell below $15 a barrel in late August for the first time since the start of 2021. The 3-2-1 spread estimates that US refineries process three barrels of oil to produce two barrels of gasoline and one barrel of diesel.
Excluding renewable fuel blending obligations, Gulf Coast gasoline margins averaged $4.65 a barrel as of Sept. 13, down from $15.78 a year earlier, and diesel margins were a little less than $11, down from more than $40, according to the Petroleum Price Information Service.
excess supply of diesel
Oversupply in the global diesel market due to weak demand is one of the main reasons for weak margins.
The International Energy Agency estimates that demand for diesel and gasoline will average 28.3 million barrels per day this year, down 0.9% from 2023, while demand for gasoline, jet fuel, liquefied petroleum gas and fuel oil will grow over the same period.
London Stock Exchange data show that European diesel margins fell to about $13 a barrel at the end of August, the lowest level since December 2021. The average price in August was US$16.6 a barrel, less than half the August 2023 average price of US$38.3.
While seasonal demand could provide support, the near-term outlook remains weak.
Refining profits are expected to remain low for the rest of the year, although there could be some growth as winter diesel demand in Europe soars, Energy Aspects analyst Raul Caldaria said.
Gasoline margins in Europe are also under pressure despite strong demand. LSEG data showed the average price was US$12.1 per barrel in August, down 61% from US$31 per barrel in August 2023.
An Eni (ENI.MI) spokesman said the Italian refiner was “taking steps to mitigate the decline in refining profits”, but declined to elaborate on the measures.
A spokesman for Spanish refiner Cepsa said it was keeping a close eye on profit margins but had made no decision about slowing processing.
New refinery
The opening of many new refineries has put pressure on margins, while older refineries, especially in Europe, are bearing the brunt.
Earlier this month, Petroinos confirmed thatGrangemouth refinery in Scotland to close andGermany is also likely to be shut down.
New production capacity added this year includes the Dangote plant in Nigeria with a daily output of 650,000 barrels, the Dos Bocas plant in Mexico with a daily output of 340,000 barrels, the Al Zor plant in Kuwait with a daily output of 615,000 barrels and the Duqm plant in Oman with a daily output of 230,000 barrels.
“There is currently too much refining capacity compared to global demand levels, and adding additional capacity will only make the situation worse,” said David Veitch, chief economist at Vortexa.
Bank of America analysts said on September 13 that global refining profit margins are expected to continue to decline, with a quarterly reduction of 25%, a 50% drop in spot prices and an annual decline of 1.5 million barrels per day in new refining capacity.
