Oil refiners across Asia, Europe, and the United States are experiencing a significant decline in profitability, reaching multi-year lows. This downturn highlights a broader slowdown in global demand following a period of surging returns post-pandemic.
The current weakness in refining profits is largely attributed to soft consumer and industrial demand, particularly in China, where economic growth has slowed and the adoption of electric vehicles is rising. The introduction of new refineries in Africa, the Middle East, and Asia has further intensified the downward pressure on profits.
Companies like TotalEnergies and trading firms such as Glencore had enjoyed substantial profits in 2022 and early 2023, capitalizing on supply shortages stemming from geopolitical tensions, including Russia’s invasion of Ukraine and disruptions in the Red Sea. However, analysts suggest that the refining supercycle may be ending as supply from newly opened refineries begins to outpace slower-growing fuel demand.
As an indicator of this trend, Singapore’s refining profits fell to $1.63 per barrel on September 17, marking the lowest level for this season since 2020. Diesel margins in Asia also plummeted to a three-year low on the same day.
The sluggish Chinese economy plays a crucial role in this downturn, with industrial output growth hitting a five-month low in August and refinery output declining for the fifth consecutive month due to weak fuel demand.
In the United States, demand has not met expectations either. The 3-2-1 crack spread, a key profitability measure for refiners, dropped below $15 per barrel in late August, the first time it has fallen that low since early 2021. Gulf Coast gasoline margins averaged $4.65 per barrel as of September 13, a stark decrease from $15.78 a year ago, while diesel margins fell to just over $11, down from over $40 last year.