Sep 1 / Victor Arduin

Energy Weekly Report - 2023 09 01

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"Despite U.S. refinery margins having fallen since the middle of 2022, they remain at historically high levels, resulting in substantial profits from oil product production."

Strong Refinery Margins Due to High Demand and Low Inventories

  • Refineries are enjoying strong margins as robust demand outpaces supply increases, putting pressure on inventories and creating a tight market for gasoline and diesel.
  • Middle distillates are beginning to outperform gasoline, emerging as the primary margin drivers. As the North Hemisphere approaches the end of summer, there will be increased demand for winter-grade fuels, including heating oil.
  • Furthermore, unplanned outages and the hurricane season introduce increased uncertainty regarding refined products’ production in the United States.
  • The OPEC+ strategy to limit global oil supply is having effects. The United States has significantly reduced its oil inventories in five of the past six weeks.


So far, 2023 has been marked by significant fluctuations in the energy complex, with a strong devaluation in oil prices early this year that was reversed in the second half. Also, concerns about low inventories are impacting gasoline and diesel prices.

Nevertheless, the refineries have nothing to complain about as they have achieved high profit margins during this year. Compared to historical values, margins remain at the top performances in recent years. Demand continues to grow, and due to limited expansion in production, a legacy of the COVID-19 period, the market may remain tight.

The rapid decline in American oil stocks reinforces the idea of a very tight market for this year. After two weeks of redution, the main benchmarks are expected to close the week with gains, thanks to OPEC+ measures.

Image 1: Refined Products Crack Spread Ratio (%)

Source: Refinitiv

Image 2: Refinery Utilization in U.S. (%)

Source: Refinitiv

Crack Margins Throughout 2023

Despite U.S. refinery margins having fallen since the middle of 2022, they remain at historically high levels, resulting in substantial profits from oil product production. The reasons for this strong result are the persistent demand amidst lower-than-average inventories of gasoline and diesel. Additionally, the increase in demand has outpaced the net supply additions, resulting in market tightness.

Meanwhile, the demand for middle distillates remains strong in various regions around the world. Recently, the Executive Vice President of Marketing at Phillips 66, a major American refinery, mentioned a 9% growth in demand in Latin America and 4% in Asia, further bolstering optimism regarding the excellent margins expected for the remainder of 2023. Profits from processing a barrel of crude oil at refineries have seen substantial gains, as indicated in chart 4. Despite crack spreads encouraging high refining utilization, inventory levels have not shown significant signs of buildup thus far.

Image 3: U.S. Crude Oil and Refined Products Futures

Source: Refinitiv

Furthermore, additional factors are contributing to the upward momentum in refined product prices. For instance, a fire incident at the Garyville refinery has led to a halt in production on 25th of August. The facility is responsible for generating approximately 265 thousand barrels per day (bpd) of gasoline, which accounts for roughly 3% of the entire U.S. consumption. Moreover, the intense heat had affected the U.S. refining hub along the Gulf Coast resulting in outages.

The current trend shows middle distillates outperforming gasoline, taking the lead as primary margin drivers. Looking ahead, margins in the fourth quarter might experience a dip from their current levels. This forecast can be attributed to the expected decline in gasoline margins as refineries shift towards manufacturing more economically viable winter-grade fuels, including heating oil. However, future prices may remain favorable for refineries when compared to historical levels.

Image 4: Crack Refinery Profit by Region (US$)

Source: Refinitiv

OPEC+ in Focus

The market eagerly awaits the next steps of OPEC+. It is expected that Saudi Arabia may voluntarily cut its production by 1 million barrels per day (bpd). This perspective gained strength after the announcement last Thursday by Deputy Prime Minister Alexander Novak, stating that Russia has agreed to restrict its exports next month.

The strategy of OPEC+ countries to restrict the global oil supply seems to be working. The United States has significantly reduced its oil inventories in five of the most recent six weeks due to increasing exports and domestic demand, reinforcing the sentiment of a tight energy market for the rest of the year.
However, there are significant events that could jeopardize this rather bullish trend. A shift in U.S. monetary policy or an economic slowdown in the country could quickly push down oil prices.

Image 5: Major Oil Benchmarks vs. U.S. Crude Oil Inventories

Source: Refinitiv

In Summary

The strong margins gains from the refining market are the result of a structural change in the energy sector and are likely to take some time to reverse.

The pandemic, for example, significantly reduced the demand for refined products, affecting refineries' finances and reducing incentives for production expansion. Consequently, the world has seen fewer investments in the refining sector.

One of the few expansion projects is the Dangote refinery in Nigeria, which could alleviate diesel market tightness in 2024. However, despite being designed to become the world's largest refinery, it will take some time to reach its full production capacity.

In the mean time, the major oil benchmarks Brent and WTI are heading for another week of gains after losing momentum in the past two weeks. It appears that the OPEC+ supply restrictions are increasing their impact on the market. Despite the gains achieved so far, the risks of an economic slowdown or further interest rate hikes may exert a bearish impact on the oil trading market.

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Livea Coda


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