Refiners worldwide are currently enjoying a surge in profits due to strong fuel margins, providing a temporary boost for a sector that has struggled in recent years. This favorable situation has coincided with a tightening of fuel supply caused by plant closures, which has intensified as peak summer demand approaches. Interestingly, this rise in refining margins occurs against a backdrop of falling crude oil prices, which hit a four-year low in May after OPEC+ accelerated the unwinding of previous output cuts. Analysts are noting that refining margins remain robust due to a tight balance between supply and demand.
Neil Crosby of Sparta Commodities points out that despite earlier concerns over economic slowdowns and the increasing popularity of electric vehicles, demand has exhibited resilience. However, refining margins, which indicate the profitability of converting crude oil into fuels like gasoline and diesel, remain well below the highs recorded in 2022. Several factors contribute to this situation, including regional refinery closures in the U.S. and Europe, which have dampened global refinery capacity growth and made operational refineries more lucrative. According to energy consultancy FGE, significant declines in diesel and gasoline supply are projected this year, creating an even tighter market for essential fuels.
This phenomenon has been particularly beneficial for refiners producing both light and heavy fuel products. As fuel inventories in key markets have declined, demand for refinery output, especially leading into the summer months, has surged. Analysts from JPMorgan indicate that stock levels in the OECD region fell dramatically from January to May, which supports elevated product prices. Nonetheless, there are cautionary signs indicating that this current strength in margins may be short-lived.
As refiners ramp up production to capitalize on higher margins, the potential for increased supply may soon outstrip demand, especially amid ongoing trade tensions that could hinder broad growth. Experts suggest that refiners should consider hedging to mitigate risks during this transient period of profitability.