Here’s What Refining Margins Say About the State of the Oil Market

On Sunday, Saudi Arabia announced unilateral cuts to crude production, on top of already pledged reductions in output that it is making alongside other producer nations. Oil futures initially rose, then fell again because the market is dogged by uncertainty about demand.

But the profits refineries make from turning crude into fuels like gasoline and diesel have been creeping up for the past several weeks, suggesting end-user consumption is at least holding up.

Bloomberg recently asked three energy analysts for their take on key margins, where they might be going and what they reveal about the state of the market. Here are their answers:

Kpler

“My view is that there will be a rally in refinery margins, but not a major one,” said Yaping Wang, a senior refinery analyst at Kpler Ltd. While US summer driving season and seasonal demand for heating oil in autumn should lift refining margins, economic indicators from China are still lackluster, he said.

America’s gasoline inventories are now at the lowest level for the time of year since at least 2014, according to Energy Information Administration data. For distillates, stockpiles match the lowest seasonal level since 2004.

“The current level of gasoline stock in the US is unsustainable, so something has to give,” Wang said.

Wood Mackenzie

This year is “distinctly different” from 2022, according to Wood Mackenzie Ltd. Last year, Western nations feared a loss of Russian diesel supply in the fallout over the war in Ukraine. Now, gasoline demand is setting the tone for refineries.

Margins have started to recover after slumping below last year’s levels in mid-March amid weak distillate demand growth, high exports from Russia and China, and new supply, said Mark Williams, the firm’s director for short-term oils. Demand growth for jet fuel is also set to be strong in the coming months, he added.

Margins are set to ease in the fourth quarter, following the US driving season and as new refineries such as Nigeria’s Dangote plant boost supply, according to Alan Gelder, WoodMac vice president for refining, chemicals and oil markets.

Energy Aspects

Global refining margins are set to stabilize in the near term, though they could be under pressure later this year, according to George Dix, refining analyst at Energy Aspects Ltd. That’s due to new capacity coming online in Asia and a crude market that is expected to become tighter.

“A string of US unplanned outages will see US margins outperform the rest of the world through summer, driven by the strength in gasoline,” Dix said. Those include incidents at Marathon Petroleum’s Galveston Bay plant and Valero Energy Corp.’s Corpus Christi refinery, both in Texas.

Already, global margins have risen from their lows at the end of April, though there’s still relative softness in gasoline in Asia. It’s the only region where the fuel is priced below diesel, according to Energy Aspects.