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The Global Refining Slump: Here's What Investors Should Know
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The global refining industry is grappling with a notable downturn in profitability, with refineries in Asia, Europe and the United States facing pressure from weakened demand and increased supply. Refiners have seen exceptional profits in recent years due to pandemic recovery and geopolitical disruptions, but the current dynamics paint a different picture. New refining capacities, alongside tepid industrial demand, especially from China, have combined to push margins to multi-year lows.
The weak outlook for refining profitability translates into a significant headwind for companies like TotalEnergies (TTE - Free Report) , Eni SpA (E - Free Report) and PBF Energy (PBF - Free Report) . On the other hand, diversified operators like Marathon Petroleum (MPC - Free Report) and Phillips 66 (PSX - Free Report) are better placed to weather the downturn.
Demand & Supply Woes Plaguing Refiners
Sluggish Demand Growth and EV Impact: One of the key reasons behind the fall in profits is sluggish fuel demand. This is particularly evident in China, the world’s largest oil importer, where the economic slowdown has hampered industrial output. In August, China’s oil refinery output declined for the fifth consecutive month, reflecting soft demand and weak export margins. Additionally, the rise of electric vehicles has started to dampen demand for traditional fuels, further straining the refining sector.
The impact of slow demand isn’t limited to Asia. In the United States, the 3-2-1 crack spread, a key profitability measure, has slumped below $15 a barrel, a level not seen since 2021. This indicates that U.S. refiners, too, are feeling the pinch, with gasoline and diesel margins declining sharply. Diesel, in particular, faces a global oversupply issue, which is expected to keep margins under pressure for the foreseeable future.
An Oversupplied Market: While demand weakens, supply continues to grow, thanks to several new refinery projects that have come online. Africa, the Middle East and Asia have all seen the start-up of large refineries, including Nigeria's 650,000 bpd Dangote plant and Kuwait's 615,000 bpd Al Zour facility. These additions have significantly increased global refining capacity, worsening the oversupply situation.
Older refineries, particularly in Europe, are feeling the brunt of this oversupply. For example, Scotland’s Grangemouth refinery is set to close in 2025 due to unsustainable margins. In response to the ongoing challenges, some refiners are cutting back on production, though this may not be enough to balance the market in the near term.
Some Refiners Feel the Pinch While a Few Stands Out
The oversupply issue is reflected clearly in profit margins. Diesel margins in Europe have tumbled to around $13 a barrel, the lowest since late 2021, while gasoline margins are under pressure despite relatively stable demand. This situation is further exacerbated by the fact that some U.S. refiners are entering one of the lightest fall maintenance seasons in three years, meaning that more capacity remains operational, adding to the supply glut.
European downstream operators like TotalEnergies and Eni, which benefited from soaring margins in 2022 and early 2023, are now facing headwinds. While some, like Italy-based Eni, have begun implementing measures to mitigate the drop in margins, others are still assessing their strategies. Among the U.S. companies most impacted by the current environment are PBF Energy and Delek US, which are already making difficult decisions regarding shareholder returns, with the potential for cuts in buyback programs. Valero Energy, another significant player, has seen downgrades as it faces near-term issues over refining income.
Meanwhile, Zacks Rank #3 (Hold) refiners with diversified operations, like Marathon Petroleum and Phillips 66, are better equipped to navigate the downturn. Their exposure to non-refining cash flows, combined with strong balance sheets, offers resilience in challenging market conditions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Way Ahead for Refiners
The short-term outlook for the refining industry remains muted. The International Energy Agency forecasts diesel and gasoil demand to contract 0.9% this year, with limited signs of recovery. However, there could be some support from higher seasonal demand for diesel during the winter months, particularly in Europe. Gasoline demand, though slightly more robust, is not strong enough to offset the overall downturn in the sector.
Despite the current challenges, some analysts maintain a cautiously optimistic view of the future. A light maintenance season could help soak up some of the excess crude supply, providing a slight lift to oil prices and potentially stabilizing refining margins.
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The Global Refining Slump: Here's What Investors Should Know
The global refining industry is grappling with a notable downturn in profitability, with refineries in Asia, Europe and the United States facing pressure from weakened demand and increased supply. Refiners have seen exceptional profits in recent years due to pandemic recovery and geopolitical disruptions, but the current dynamics paint a different picture. New refining capacities, alongside tepid industrial demand, especially from China, have combined to push margins to multi-year lows.
The weak outlook for refining profitability translates into a significant headwind for companies like TotalEnergies (TTE - Free Report) , Eni SpA (E - Free Report) and PBF Energy (PBF - Free Report) . On the other hand, diversified operators like Marathon Petroleum (MPC - Free Report) and Phillips 66 (PSX - Free Report) are better placed to weather the downturn.
Demand & Supply Woes Plaguing Refiners
Sluggish Demand Growth and EV Impact: One of the key reasons behind the fall in profits is sluggish fuel demand. This is particularly evident in China, the world’s largest oil importer, where the economic slowdown has hampered industrial output. In August, China’s oil refinery output declined for the fifth consecutive month, reflecting soft demand and weak export margins. Additionally, the rise of electric vehicles has started to dampen demand for traditional fuels, further straining the refining sector.
The impact of slow demand isn’t limited to Asia. In the United States, the 3-2-1 crack spread, a key profitability measure, has slumped below $15 a barrel, a level not seen since 2021. This indicates that U.S. refiners, too, are feeling the pinch, with gasoline and diesel margins declining sharply. Diesel, in particular, faces a global oversupply issue, which is expected to keep margins under pressure for the foreseeable future.
An Oversupplied Market: While demand weakens, supply continues to grow, thanks to several new refinery projects that have come online. Africa, the Middle East and Asia have all seen the start-up of large refineries, including Nigeria's 650,000 bpd Dangote plant and Kuwait's 615,000 bpd Al Zour facility. These additions have significantly increased global refining capacity, worsening the oversupply situation.
Older refineries, particularly in Europe, are feeling the brunt of this oversupply. For example, Scotland’s Grangemouth refinery is set to close in 2025 due to unsustainable margins. In response to the ongoing challenges, some refiners are cutting back on production, though this may not be enough to balance the market in the near term.
Some Refiners Feel the Pinch While a Few Stands Out
The oversupply issue is reflected clearly in profit margins. Diesel margins in Europe have tumbled to around $13 a barrel, the lowest since late 2021, while gasoline margins are under pressure despite relatively stable demand. This situation is further exacerbated by the fact that some U.S. refiners are entering one of the lightest fall maintenance seasons in three years, meaning that more capacity remains operational, adding to the supply glut.
European downstream operators like TotalEnergies and Eni, which benefited from soaring margins in 2022 and early 2023, are now facing headwinds. While some, like Italy-based Eni, have begun implementing measures to mitigate the drop in margins, others are still assessing their strategies. Among the U.S. companies most impacted by the current environment are PBF Energy and Delek US, which are already making difficult decisions regarding shareholder returns, with the potential for cuts in buyback programs. Valero Energy, another significant player, has seen downgrades as it faces near-term issues over refining income.
Meanwhile, Zacks Rank #3 (Hold) refiners with diversified operations, like Marathon Petroleum and Phillips 66, are better equipped to navigate the downturn. Their exposure to non-refining cash flows, combined with strong balance sheets, offers resilience in challenging market conditions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Way Ahead for Refiners
The short-term outlook for the refining industry remains muted. The International Energy Agency forecasts diesel and gasoil demand to contract 0.9% this year, with limited signs of recovery. However, there could be some support from higher seasonal demand for diesel during the winter months, particularly in Europe. Gasoline demand, though slightly more robust, is not strong enough to offset the overall downturn in the sector.
Despite the current challenges, some analysts maintain a cautiously optimistic view of the future. A light maintenance season could help soak up some of the excess crude supply, providing a slight lift to oil prices and potentially stabilizing refining margins.