Low refining margins hit profitability of global oil refineries

Oil processing companies worldwide reported a substantial decline in profitability during the July-September 2024 quarter, driven by weak refining margins and limited flexibility for product adjustments. Refining margins, also known as gross refining margins (GRM), dropped to a low of US$1.3 a barrel in September 2024, the lowest since the peak of the Covid-19 pandemic. This decline was attributed to consequently low crude oil prices, increased availability of Russian crude, and weak demand, particularly from China, the world’s second-largest economy. GRM represents the difference between the total value of petroleum products produced by an oil refinery and the cost of the rate material, crude oil.

The refining margins are directly proportional to the growth in the global economy. According to the International Monetary Fund’s (IMF’s) October 2024 report, the global economic growth is expected to remain stable at 3.1 percent in the calendar year 2024, and rise marginally to 3.2 percent in the calendar year 2025. However, the balance of risks is tilted to the downside, with geopolitical tensions, financial market volatility, and problems in China’s property sector as potential threats. As a consequence, the demand for petroleum products remained weak due to slowing economic activity in China and Europe. Increasing adoption of electric vehicles, biofuels, and liquefied natural gas use in trucking is steadily reducing petroleum fuel consumption across much of Asia and Europe. Margins have also come under pressure due to new refining capacity.

TotalEnergies’ profit hits
French oil major TotalEnergies reported that its profit declined to hit the lowest in three years of US$ 4.1 billion during the July-September 2024 quarter, slightly missing street expectations due to a substantial decline in refining margins and upstream outages. The company’s adjusted net income stood at US$ 4.7 billion, down by 37 percent from a year earlier, and 12.7 percent lower from the sequential previous quarter. TotalEnergies warned earlier this month that its financial results would take a hit due to a 65 percent decline in refining margins.

Patrick Pouyanne, Chief Executive, TotalEnergies, stated, “Refiners are undergoing a tough phase now due to low margins. The tough environment for refineries marks a return to the long-term trend that had been briefly interrupted by sky-high profitability following Russia’s invasion of Ukraine. Some small European refineries which were supposed to shut down their operations were maintained as the industries stopped to capture good margins. Small refineries in Europe are operating just with survival margins. We are too small to cut production but would examine our six European refineries and convert the weakest into biorefineries producing renewable fuels.”

LyondellBasell misses estimates
Petrochemical producer LyondellBasell reported a net loss of US$ 23 million from its refining segment in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) during the July-September 2024 period, compared to a profit of US$ 105 million in the corresponding of the previous year. The company’s crude throughput decreased by around 8,000 bpd due to unplanned downtime in the July-September 2024 quarter. LyondellBasell reported lower margins, driven by compressed gasoline and distillate crack spreads and high refining operating rates, with margins also known as the Maya 2-1-1 industry crack spread decreasing by US$ 15 a barrel.

The company forecasts that the demand for its products would continue to remain softer during the October-December 2024 quarter due to seasonality year-end factor, coupled with sequentially higher natural gas and ethane feedstock costs moderating North American integrated polyolefins. Meanwhile, manufacturing activity in the Eurozone declined in September, as demand fell sharply despite factories slashing prices.

IOCL turns red
India’s leading government-owned oil refiner, Indian Oil Corporation Ltd (IOCL), posted a net consolidated loss of Rs 448.78 crore for the quarter ended September 2024, compared to Rs 13,713.08 crore of profit earned during the corresponding period last year. The company reported a net profit of Rs 3,722.63 crore for the April-June 2024 quarter.

The consolidated revenue from the company’s operation stood at Rs 198,615.8 crore for the July-September 2024 quarter as against Rs 205,283 crore in the comparable quarter of the previous year. IOCL earned a phenomenal Rs 219,864.34 crore revenue from its operations during the April-June 2024 quarter. The public sector company consumed raw materials worth Rs 107,953.45 crore during the July-September 2024 quarter, compared to input valued Rs 104,985.99 crore used in the April-June 2024 quarter.

Other Indian oil marketing companies (OMCs) including Hindustan petroleum Corporation Ltd (HPCL), and Bharat Petroleum Corporation Ltd (BPCL) also reported their net profit declining by 70-99 percent during the July-September 2024 quarter due to lower margins. OMCs also reported inventory and liquefied petroleum gas (LPG) loss in the quarter under review, which contributed to the decline in operating profits.

China to cut refining output
Refiners across China are planning to cut their fuel output during the October-December 2024 quarter and maintain lower production during the January-March 2025 quarter despite seasonal demand uptick. The output cut was triggered by a reduction in the operational profit and a substantial fall in fossil fuel consumption in road transport. China continued to be the world’s leading crude importer. However, lower refining output triggered by the weak fuel demand sentiment may cap the country’s crude oil imports, tighten domestic fuel supply, and support prices going forward.

Global consultancy firm Rystad Energy forecast China’s refining throughput at 14.7 million tonnes per day (bpd) in the October-December 2024 quarter, compared to 15 million bpd projected earlier, following some refiner’s recent output cut announcements. Emma Li, an analyst with research firm Vortexa, projects China’s refining output to decline by 5 percent year-on-year (yoy) and may remained flat at 14.7 million bpd in the January-March 2025 period. According to reports, China’s refining output declined yoy for a sixth consecutive month in September as refiners struggled with lower domestic fuel sales and government export quotas.

Demand growth slows
The International Energy Agency (IEA) forecasted world crude oil demand to remain subdued in the calendar year 2024. In its periodical publication titled ‘World Energy Outlook 2024’ published recently, IEA said, “While geopolitical risks remain elevated, an easing in underlying market balances and prices is on the horizon as slowing oil demand growth sees spare crude oil production capacity rise to 8 million barrels per day (bpd) by 2030. A wave of new liquefied natural gas (LNG) projects is set to add almost 50 percent to available export capacity by 2030.”

Earlier, the crude oil producers body which accounts for nearly a third of global supply, OEPC+, revised world oil supply downwards in its monthly publication for October titled ‘Oil Market Report (OMR)’. The Organization lowered world oil demand growth forecast by 106,000 barrels per day (bpd) to 1.9 million bpd for the calendar year 2024, down from last month’s assessment.

Crude oil demand clocked a marginal growth of approximately 1 percent both sequentially and on-year in September. Demand rose about 6 percent month-on-month in China and showed positive signs in Europe, but was partially offset by a slowdown in Japan. Overall crude oil supply during the month declined 1 percent on year, mostly owing to a fall in supply from OPEC nations, especially Libya, where the output hit its lowest mark since 2021 with the country’s central bank in turmoil. Iraq’s attempts to adhere to the pledged cutbacks also dragged down supplies. OPEC+ has also deferred plans to increase production by a few months as the members delay phasing out of their voluntary cuts.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com