Oil Refining Margins Bounce Back To Pre-Crisis Levels

Recovering fuel demand and additional demand for oil products amid record-high coal and natural gas prices have pushed up global oil refining margins to their pre-pandemic levels.

For the first time since COVID crippled fuel demand and margins in early 2020, refining margins in the key regions Asia, Europe, and North America have rebounded strongly in recent weeks, according to analysts and company officials who spoke to Reuters.

Globally, refinery activity continued to disappoint in the third quarter, with lower throughputs in China and India in August only partially offset by a stronger performance in developed economies in Asia and Europe, the International Energy Agency (IEA) said in its latest monthly report last week.

However, “Implied 3Q21 refined product balances show the largest draw in eight years, which explains the strong increase in refinery margins in September despite significantly higher crude prices,” the agency noted.

Earlier this month, the Singapore complex refining margin, the key indicator of profitability in Asia, exceeded $8 per barrel, which was the highest since margin since September 2019, according to Refinitiv Eikon data cited by Reuters.

The refinery margin in northwestern Europe hit the highest since April last year, exceeding $9 per barrel last week. Refinery margins in the U.S. Gulf Coast have almost tripled over the past year to around $14 a barrel, as per Refinitiv Eikon data.

Gasoil margins in Asia have surged by some 60 percent since last month and have become the main contributor to refinery profits, outpacing gasoline, traders and analysts told Reuters last week.

Demand for gasoil has soared amid an energy crisis and record-high prices of coal and natural gas across Asia and Europe.

Fitch Ratings sees upside to the Asia-Pacific refining margins in the short term, but warns of oversupply down the road and fresh pandemic-related risks to demand.

“Recovering demand for transportation fuels in APAC, increased use of gasoil as a feedstock for power generation, and gasoil export quota cuts from China have been driving the rebound in APAC benchmark gasoil refining margins since September 2021, which may provide upside to our near-term refining margin assumptions for Indian refiners,” Fitch Ratings said in a report on Monday.

“However, margins remain vulnerable to potential pandemic setbacks and the medium-term demand-supply balance as planned capacity additions in the region increase output,” the rating agency added.

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