Oil refiners are seeing reduced profitability in their gasoline sales during the peak US summer driving season, falling short of expectations despite increased production efforts.
The softness in gasoline markets marks a significant shift from years of robust profits from transportation fuels. In the US, the largest gasoline market globally, refiners significantly ramped up production, anticipating higher demand that did not materialize. Government data for the first week of June showed US gasoline demand at 9 million barrels per day (bpd), down 1.7 percent from last year and the lowest seasonally since 2021.
In Asia, declining gasoline market conditions have prompted production cuts, with refiners elsewhere likely to follow suit in the coming weeks. This trend could dampen global crude oil demand.
“Given t” the retreat from high-profit margins, we see risks to refiners maintaining their strategy of maximum output to achieve record profits,” noted “MI, a unit of Fitch Solutions, in a recent statement.
Brent oil prices have dropped approximately nine percent from mid-April to about $83 per barrel, driven by concerns that the OPEC+ group might increase supply. The producer group recently cautioned about a sluggish start to the summer driving season and the impact of low margins on market sentiment.
Despite the decline in crude prices, Asian refinersrefiners’from refining gasoline from a barrel of Brent fell by half in late May to around $4 per barrel due to an oversupply of fuel. Overall refining margins in Singapore fell to under $2 per barrel in May, compared to an average of $5 a year earlier.
In Europe, gasoline refining margins dropped to $10.80 per barrel on June 13, the lowest since January 25. Similarly, the US gasoline crack spread, reflecting the difference between gasoline futures and the cost of WTI crude oil, fell below $22.50 per barrel for the first time since February.
Taiwan’sTaiwan’s Petrochemical Corp Plans Production Cut Amid Weakening Demand
Formosa Petrochemical Corp, a major exporter of refined products in Asia, intends to reduce its crude distillation unit run rates in June to 440,000 barrels per day (bpd), down from the initially planned 480,000 bpd.
According to a spokesperson from Formosa, increased oil flows from the Middle East to Asia and higher exports from India have dampened profit margins. Nonetheless, demand in Asia remains robust, the spokesperson told Reuters.
In the US, a combination of factors such as increased air travel over long-distance driving, the rise of fuel-efficient vehicles, and the adoption of electric cars has exerted pressure on fuel demand, as noted by UBS analyst Giovanni Staunovo last month.
Moreover, elevated output from American refineries coupled with sluggish demand has boosted US gasoline inventories by 5.7 million barrels since April, reaching 233.5 million barrels by June 7, the highest level since 2021.
Data from the US Energy Information Administration (EIA) revealed that US refiners trimmed their run rates to 95% by the week ending June 7, following a peak of 95.4% the prior week — marking the first reduction since April.
Analysts, including Mizuho’Mizuho’s Mizuho’s Yawgeree, believe there will be a potential further reduction in refinery rates if demand continues to falter. Yawger highlighted concerns over what could potentially be one of the weakest summer seasons for US gasoline demand in the post-COVID era, emphasizing that refiners cannot sustain production at 95% utilization under current conditions.
The EIA recently revised its forecast for US gasoline consumption this year to 8.89 million bpd from an earlier estimate of 8.91 million.
Challenges Amidst Abundant Supply in Global Gasoline Markets
Rabobank strategist Joe DeLaura anticipates a potential margin improvement as US gasoline demand typically rises during summer. However, he cautioned that the market has consistently failed to meet expectations.
Support for margins could emerge from delays in the commissioning of new refineries, such as Mexico’s Mexico refinery in Dos Bocas, aimed at reducing the country’s ss. As of May, Dos Bocas faced delays and had not yet achieved commercially viable gasoline and diesel production. Similarly, NigeriaNigeria’s Nigeria’sry postponed gasoline deliveries until July.
Nevertheless, the market continues to grapple with substantial supply increases from new refinery startups and expansions of existing facilities, particularly boosting fuel exports from the Middle East, India, and China.
According to Kpler data, Middle Eastern gasoline exports have hit seasonal highs over the past six months. Indian and Chinese refiners are leveraging discounted Russian oil, contributing to heightened supplies that are expected to keep Asian gasoline margins under pressure throughout the summer, noted analyst Priti Mehta.
“The pea” for gasoline cracks occurred in April, averaging $17.3 per barrel of Dubai crude in Asia. We do not anticipate significant strengthening in cracks through the summer period,” Mehta “emarked.
WoodMac reported that Chinese gasoline exports surged by approximately 100,000 barrels per day (bpd) from April to May, reaching around 350,000 bpd by the end of last month. Meanwhile, Indian gasoline exports averaged 360,000 bpd in May, marking an increase of 50,000 bpd from the previous month.
Global Gasoline Refining Margins Face Downturn Amid Sluggish Summer Driving Season
The global gasoline refining industry experiencingga in downturn, mainly due to a sluggish summer driving season. Traditionally, summer months see increased demand for gasoline as people embark on vacations and road trips, leading to higher consumption. However, recent trends have defied this expectation, posing challenges for refineries worldwide.
Challenges in Global Gasoline Refining Margins Amidst Summer Driving Slump
Struggling to maintainallenges in maintaining profitable margins amidst a summer-driving slump. The slowdown in gasoline demand, attributed to various factors, including shifts in consumer behavior towards more fuel-efficient vehicles and reduced long-distance travel due to alternative transportation modes, has contributed to this downturn.
Impact of Slow Summer Driving Season on Global Gasoline Refining Margins
The impact of a slow summer driving season on global gasoline refining margins is profound. Refineries had anticipated higher throughput and profitability during this period, but subdued consumer activity has led to an oversupply scenario. This imbalance has exerted downward pressure on refining margins, forcing operators to reassess production levels and operational strategies.
Summer Driving Season Weakness Sinks Global Gasoline Refining Margins
The weakness in the summer driving season has significantly impacted global gasoline refining margins, sinking them to lower levels than anticipated. Refineries, particularly in key markets like the US, Europe, and Asia, have been forced to adjust production rates and manage inventory levels carefully to navigate this challenging period.
Current Trends: Global Gasoline Refining Margins Decline Amid Summer Demand Slowdown
Current trends indicate a decline in global gasoline refining margins as the summer demand slowdown persists. Refineries are witnessing reduced crack spreads—the difference between the cost of crude oil and the price of gasoline—which directly impacts profitability. This trend is exacerbated by increased gasoline inventories and competitive pressures in global markets, further squeezing margins for industry participants.
Frequently Asked Question
Why are global gasoline refining margins declining?
Global gasoline refining margins are declining primarily due to a sluggish summer driving season. Reduced consumer travel, influenced by increased adoption of fuel-efficient vehicles and alternative transportation modes, has led to lower-than-expected gasoline demand. This oversupply of gasoline in the market has driven down refining margins.
How does the summer driving season impact gasoline refining margins?
The summer driving season traditionally boosts gasoline demand as people travel more frequently for vacations and road trips. However, recent years have seen shifts in consumer behavior, including fewer long-distance trips and increased use of alternative transport modes like air travel. TReduceddemand during the typically high-demand summer months has negatively impacted refining margins.
Which regions are most affected by the decline in gasoline refining margins?
Regions heavily reliant on summer driving demand, such as North America, Europe, and parts of Asia, are most affected by the decline in gasoline refining margins. These areas typically experience peak gasoline consumption during the summer, making them particularly vulnerable to fluctuations in seasonal demand.
What are crack spreads, and why are they essential to understanding refining margins?
Crack spreads refer to the difference between the cost of crude oil and the price of refined products, such as gasoline. They serve as a critical indicator of refining profitability. When crack spreads narrow, as seen during periods of low gasoline demand or high crude oil prices, refining margins tend to decrease because the cost of producing gasoline becomes less favorable than its market price.
How are refineries adjusting to mitigate the impact of declining margins?
Refineries are adjusting their operations in response to declining margins by optimizing production levels and managing inventory more efficiently. Some refineries may reduce run rates or temporarily halt operations to balance supply with reduced demand. Additionally, refineries are focusing on cost-cutting measures and exploring new markets or product streams to diversify revenue streams.
What role do geopolitical factors play in influencing gasoline refining margins?
Geopolitical factors, such as changes in oil supply dynamics, sanctions on oil-producing countries, and geopolitical tensions affecting oil prices, can significantly impact gasoline refining margins. Uncertainty in global oil markets can lead to volatility in crude oil prices, directly influencing the cost basis for refineries and affecting their profitability.
Are there any long-term implications for the refining industry due to the currentmargin downturns?
The current downturn in gasoline refining margins may have long-term implications for the industry. Refineries could face pressure to invest in technology upgrades or diversify into cleaner energy alternatives to remain competitive amid evolving consumer preferences and regulatory changes. Additionally, the industry may witness consolidation as more minor, less efficient refineries struggle to sustain profitability in a challenging market environment.
Conclusion
The slump in global gasoline refining margins during the slow summer driving season highlights significant industry challenges. Reduced consumer travel, coupled with shifts towards more fuel-efficient vehicles and alternative transportation modes, has led to an oversupply of gasoline and downward pressure on refining profitability. Regions reliant on summer driving demand, such as North America, Europe, and parts of Asia, have been particularly affected. The decline in refining margins underscores the critical importance of understanding crack spreads—the difference between crude oil costs and refined product prices—as a crucial indicator of refinerirefineries’bility.
