In recent years, refineries have posted their highest ever margins on the back of a post-COVID rebound and Russia-Ukraine disruption. Consensus remains overly optimistic on higher refining margins in the medium-term. We see many structural headwinds to margins, particularly from lower demand and excess capacity. European and Chinese refineries face the greatest exposure to these risks in our view.
In this Special Section, we analyse the main drivers of the refining sector: product demand and refining capacity. We offer projections for these factors and outline our expectations for future margins, evidencing our negative outlook.
The normalisation of refining margins from historic highs
To analyse refining economics, we use the 3-2-1 crack spread. In Figure 3 below, we see little change in refining spreads from 2014-2019 except for a rise in early 2015 at the start of the OPEC glut. During the COVID crisis, margins initially dropped as lockdowns restricted demand and refineries had to impose production limitations. As demand rapidly rebounded, output was unable to keep up, leading to higher refining margins. These were further exacerbated by tensions around the Russia-Ukraine war but have since begun to normalise on the back of new capacity additions.
Download the full Special section below.
