New refineries bring down profits for global refiners
Oil refiners across Asia, Europe, and the United States have seen their profitability drop to multi-year-lows. This is a significant downturn in an industry which had previously enjoyed booming returns following the pandemic. It also highlights the global slowdown.
This weakness is another sign of a softening consumer and industrial demand in China due to the slowing of economic growth and increasing penetration of electric cars. The pressure on prices has been exacerbated by the addition of new refineries in Africa, Asia and the Middle East.
TotalEnergies, a refiner, and Glencore, a trading firm, saw a boom in profits in 2022-2023. They were able to cash in on the supply shortages that resulted from Russia's invasion in Ukraine, disruptions in Red Sea navigation caused by Houthi militants and resurgence in demand after the COVID-19 epidemic.
Rory Johnston, analyst at Commodity Context, said that it appears the supercycle of refining we have experienced in the last few years is coming to an ending. The supply from newly opened refineries has finally caught up with the slower-growing fuel demands.
Singapore's refining profit, which is a leading indicator for Asia, dropped to $1.63 per barrel on September 17, a seasonally low since 2020. According to LSEG, Asia's diesel margins fell to a 3-year low the same day.
A key factor is the weak Chinese economy. The world's largest oil importer saw its industrial output growth fall to a 5-month low in August, while oil refinery production fell for a 5th month due to weak fuel demand and soft margins.
The 3-2-1 crack spread is also popular in the United States where demand is also below expectations.
Gulf Coast gasoline margins excluding renewable fuel blend obligations averaged $4.65 per barrel on Sept. 13 compared to $15.78 last year. Diesel margins were slightly over $11 compared to over $40 last.
DIESEL SUPPLY
Margin weakness is primarily due to the oversupply of diesel in the global market, which is a result of a soft demand.
The International Energy Agency predicts that diesel and gasoil consumption will average 28,3 million barrels of oil per day this year, down 0.9% from the demand in 2023. Demand for gasoline, jet-fuel, LPG, and fuel oil is expected to grow over the same period.
According to LSEG, at the end of August, European Diesel Margins dropped to $13 a barrel, their lowest level since December 2021. In August, they averaged $16.6 per barrel. This is less than half of the average $38.3 in August 2023.
Seasonal demand may provide some support, but the immediate outlook is still weak.
Energy Aspects analyst Raul Calidaria said that refining profit was expected to be low for the remainder of the year. However, there is some upside due to higher winter diesel demand in Europe.
In Europe, profit margins for gasoline are also being squeezed despite a stronger demand. According to LSEG, they averaged $12.1 a bar in August. This is down 61% from the August 2023 level of $31 a barrel.
Eni's spokesperson said that the Italian refiner "implements measures to mitigate the decrease of refining profits", but refused to elaborate.
A spokesperson from the Spanish refiner Cepsa stated that they were watching their profit margins, but had not yet made any decisions on reducing their processing.
NEW REFINERIES
Older refineries, especially in Europe, are feeling the pinch as a result of the start-up of several new refineries.
Petroineos announced earlier this month that it will close its Grangemouth Refinery in Scotland. Shutdowns are also expected in Germany.
In this year's new capacity ramp-up, Nigeria's 650,000 BPD Dangote plant will be added to Mexico's Dos Bocas. Kuwait's Al Zour, which is 615,000 BPD, and Oman's Duqm, which is 230,000 BPD, are also included.
David Wech, Vortexa's Chief Economist, said: "Globally, there is clearly too many refining capacities relative to current demand levels. New capacity only makes things worse."
Bank of America analysts said on September 13 that they expect global refining profits to continue their decline, even though new capacity has increased by 1.5 million barrels per day (bpd) year-over-year. Reporting by Ahmad Ghaddar and Robert Harvey; Additional reporting by Nicole Jao and Francesca Lardini, Pietro Lombardi, and Trixie Yap Editing by Alex Lawler, Dmitry Zhdannikov, and Miral Fahmy
(source: Reuters)
