High Crude Prices, Low Motor Fuel Demand Hurt U.S. and European Refiner Margins

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--Refiners who briefly saw strong earnings from supply shortages stimulated by embargoes on Russian crude--the so-called Golden Age of refining in Europe--have had a crude awakening this year. Diminished demand and new refineries in Africa and the EU have combined with OPEC+-led steady crude prices to squeeze the crack and, therefore, profits in second-quarter 2024 earnings reports released last week.

Large European refiners including France's TotalEnergies SE (NYSE:TTE) (Courbevoie), Finland's Neste Corporation (Espoo), and Spain's Repsol (Madrid) all reported drops in income for second-quarter 2024.

Cruel Summer for Refiners in Europe
TotalEnergies' operating income slid by 34% from first-quarter numbers for its refining and chemical businesses, mostly from processing crude into fuels such as diesel, gasoline, and jet fuel.

For the first time in 10 years, Neste reported a net loss caused by drops in diesel prices, both refined and biodiesel. A further drag came from planned maintenance at its Porvoo refinery.

Repsol reported a second-quarter drop from first-quarter refining margins due to lower gasoline prices and high crude costs.

And BP plc (NYSE:BP) (London, England), which reports on July 30, also expects profits to drop, for the reasons listed above.

And, added Industrial Info's Geoffrey S. Lakings, "Slower economic activity in Europe has reduced refined fuel demand, even as new refineries have come online in Nigeria (Dangote) and in Kuwait. TotalEnergies and Neste fear their weak profits will extend into second-half 2024."

Dangote, still in the startup phase, is running at about 50% of its 650,000 barrel-per-day (BBL/d) capacity, limited in part due to challenges with crude supply, according to Industrial Info data. And Kuwait's huge Al-Zour refinery, one of the region's largest, reached full capacity of 615,000 BBL/d this spring.

U.S. Plants Also Sing the Blues
Across the pond, Exxon Mobil Corporation (NYSE:XOM) (Spring, Texas), which reports on August 2, has the same gloomy outlook for its refinery operations. And Valero Energy Corporation (NYSE:VLO) (San Antonio, Texas), with the second-largest capacity in the nation, is expected by analysts to see profitability drop from last year's $5.40 per share to $2.60 per share in second-quarter 2024.

Analysts with London Stock Exchange Group plc (LSEG) (London, England) believe Marathon Oil Corporation (NYSE:MRO) (Houston, Texas), America's largest refiner by volume, will report per-share profit of $3.22 comparted to 2023's $5.32--and they see Phillips 66's (NYSE:PSX) (Houston) per-share earnings to be $1.98 per share, an almost $2 per share drop from the $3.87 of a year earlier.

The U.S. Energy Information Administration (EIA) said refiners boosted processing capacity to 93.5% in the second quarter this year, higher than the 91% they reported a year earlier, expecting a growth in gasoline and diesel demand during the summer travel season. Those expectations fell short.

And Reuters reported, "Rising diesel inventories over the quarter, fueled by new refineries in the Middle East and higher exports from China, shrunk refining margins and cut into profits, analysts said."

The problem now is that school will be starting back soon, signaling an end to the summer travel season--meaning that demand will likely drop further in the next few weeks.

Depressed Natural Gas Prices Also Hurt Margins
Industrial Info's Daniel Graeber pointed out that liquids aren't the only issue for refiners. "Natural gas prices too are a sore spot in the energy complex. Markets have long since adjusted to the loss of Russian products and producers are feeling the strains from what looks like an oversupplied market. Norwegian energy company Equinor (NYSE:EQNR) (Stavanger), which has helped fill the Russian void in Europe, reported adjusted earnings before tax of US$7.48 billion during the second quarter, compared with US$7.8 billion a year ago. Lower natural gas prices were partially to blame for the decline in earnings."

What's Next in the Year 2025?
Lakings said that if some of the world's major economies begin to recover, 2025 could look better for this market. "The U.S. just reported a 2.5% boost in GDP output, and a Federal Reserve interest rate cut could be coming in September, which would likely stimulate buying. China also surprised markets this week with a positive economic report." However, he cautioned that there are still many elections coming, including the big one in the U.S. in November, so reactions to those results are among many yet-to-be-determined influences that cloud the view of the refiners' future.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).