The FactSet financial app noted that refineries in Asia, Europe, and the United States are facing the challenge of declining profitability to the lowest level in years, signaling a downturn in this industry that saw a surge in ROI after the COVID-19 pandemic, and also highlighting the extent of the current global demand slowdown.

Due to slowing economic growth and increasing adoption of electric vehicles, this weakness further indicates sluggish consumer and industrial demand. The start-up of new refineries in Africa, the Middle East, and Asia has also intensified downward pressure.

Refiners such as TotalEnergies and Trafigura enjoyed significant profits in 2022 and 2023, benefiting from supply shortages caused by the Russia-Ukraine conflict, disruptions in Red Sea shipping due to Houthi militants, and a strong recovery in demand after the COVID-19 pandemic.

Commodity Context analyst Rory Johnston commented, 'It appears that the refining supercycle we have experienced in the past few years may be coming to an end, as the supply of new refineries eventually catches up with slower-growing fuel demand.'

As a benchmark for Asia, Singapore refining margins dropped to $1.63 per barrel on September 17, the seasonal low since 2020. Data from the London Stock Exchange showed that on the same day, Asian diesel profit margins dropped to their lowest level in three years.

In the largest consumer country, the United States, demand fell short of expectations, and the key indicator of overall profitability, the 3-2-1 crack spread, fell below $15 per barrel at the end of August for the first time since the beginning of 2021.

According to data from the oil price information service company, as of September 13, the average gasoline profit margin (excluding renewable fuel blending obligations) along the Gulf of Mexico coast was $4.65 per barrel, lower than $15.78 per barrel a year ago, and the diesel profit margin was slightly higher at $11 per barrel, compared to over $40 per barrel in the same period last year.

Diesel oversupply

Due to weak demand, global diesel market oversupply is one of the main reasons for weak profit margins.

The International Energy Agency predicts that this year's average daily demand for diesel and diesel is 28.3 million barrels, a decrease of 0.9% from 2023, while demand for gasoline, aviation fuel, liquefied petroleum gas, and fuel oil has increased in the same period.

According to data from the London Stock Exchange, by the end of August, the diesel profit margin in Europe had fallen to about $13 per barrel, the lowest level since December 2021. The average profit margin in August was $16.6 per barrel, less than half of the August average profit margin of $38.3 per barrel in 2023.

Although seasonal demand may provide support, the short-term outlook remains weak.

Raul Caldaria, an analyst at Energy Aspects, said that refining profits are expected to remain low for the rest of the year, and increased diesel demand in Europe during the winter will bring some upside.

Despite stronger demand, gasoline profit margins in Europe are also under pressure. According to data from the London Stock Exchange, the average gasoline price in August was $12.1 per barrel, a 61% plunge from the $31 per barrel level in August 2023.

A spokesperson for Eni Group stated that the Italian oil refiner is taking measures to alleviate the decline in refinery profit margins, but refused to provide detailed information on these measures.

A spokesperson for the Spanish oil refiner Cepsa stated that they are monitoring profit margins but have not yet made a decision to slow down processing speeds.

New refineries

The commissioning of a large number of new refineries has intensified profit pressure, with older refineries (especially in Europe) also feeling the pressure.

Earlier this month, Petroineos confirmed the closure of its Grangemouth refinery in Scotland, with the closure of a refinery in Germany also expected.

This year's new production capacity includes Nigeria's Dangote plant with a daily production capacity of 0.65 million barrels, Mexico's Dos Bocas plant with a daily production capacity of 0.34 million barrels, Kuwait's Al Zour plant with a daily production capacity of 0.615 million barrels, and Oman's Duqm plant with a daily production capacity of 0.23 million barrels.

Vortexa's Chief Economist David Wech stated, "The current global refinery capacity is significantly excessive relative to demand levels, and additional production capacity will only make the situation worse."

Bank of America analysts stated on September 13 that they expect global refinery margins to continue to decline, having already fallen by 25% this quarter, with spot prices declining by 50%, while new refining capacity has increased by 1.5 million barrels per day compared to the same period last year.