Refineries are reeling from low margins and weak demand

During the last earnings season, U.S. oil refiners signaled they would cut production this quarter, pressured by lower margins and seasonally lower demand. Petrochemical producers are also struggling, especially due to overcapacity in China. And they change to overcome them.

A forecast by Wood Mackenzie, cited in a recent Reuters article on the petrochemical industry and its long-term outlook, said that nearly a quarter of global petrochemical capacity is at risk of closing permanently due to depressed – and depressing – margins by 2028. McKinsey added that the downturn in the petrochemical sector would be longer than usual, five to seven years, because of overcapacity in China. Reuters wrote that the refining industry and the largest oil industry were in trouble because the energy transition would reduce the need for petroleum fuels for transportation.

Of these forecasts, the last one is the most uncertain. It is based on the explosive growth of electric vehicles, which so far has not materialized, and even the recent growth of electric vehicle sales is reversing in every country that can no longer afford to subsidize the vehicles. If we look at the energy transition and the electrification of transportation as causes for concern in the oil industry, we may be overestimating the reality of the transition.

Overcapacity, however, is another matter. In April, Bloomberg published a story about the petrochemical industry outside of China and how it has entered a “sunset” stage due to the huge capacity gains that Chinese petrochemical producers have made over the past four years. Chinese manufacturers have forced previous industry giants out of the market because of this capacity, the report said. It was only a matter of time before the effect spread.

“This is yet another example — after steel, solar panels — where China’s structural imbalances are clearly spilling over into global markets,” Rhodium Group CEO Charlie Vest told Bloomberg last month, commenting on the industry’s growth petrochemicals of the country. That growth was starting to force industry players to cut production, Bloomberg reported at the time, with some factories operating at just half capacity amid squeezed margins from oversupply. But just like in the solar panel business, it would take some time to sort out the excess capacity. Meanwhile, petrochemical producers elsewhere would be, as Reuters said, in survival mode.

The outlook is bleakest for Asian petrochemical producers, the report says, probably because they are too close to the giant in the petrochemical room that is China. Propylene margins in Asia are set to fall below zero this year, reaching around minus $20 a tonne, according to Wood Mac, quoted by Reuters.

Meanwhile, some refineries are shutting down some petrochemical units. A petrochemical joint venture between Petronas and Aramco shut down its naphtha cracker earlier in the year, and a Taiwanese petrochemical producer shut down two of its three crackers later in the year. The situation is perhaps more problematic for petrochemical facilities that are part of refineries – they are still operating, even at a loss, Reuters reported.

“Most companies’ portfolios are integrated and balanced. If you want to consolidate them, you either have to destroy one company’s strengths or get rid of the other company’s strengths,” an executive at an unnamed refinery in South Korea. this month.

In Europe, meanwhile, refiners are seeing the end of their recent business rally. Margins are falling and demand is slowing again, with TotalEnergies and Neste warning in their latest quarterly presentations of negative developments.

“Global refining margins, which have fallen sharply since the end of the first quarter of 2024, remain affected by weak diesel demand in Europe as well as market normalization following supply disruptions from Russia,” TotalEnergies said in its quarterly report after as quoted by Reuters.

In essence, then, the European refining market is returning to normal after a brief period of excessive performance resulting from the war in Ukraine. Now that the impact of these events is waning, things are returning to the way they were before the war – with pressure from Asia remaining unchanged. There has also been additional pressure from new refiners emerging in the Middle East and Africa, although the latter – Nigeria’s Dangote refinery – has struggled to really break even.

Even so, petrochemical margins in Europe are set to increase this year, according to Wood Mac. While Asian petrochemical producers grapple with their loss of $20 a tonne on propylene, their European counterparts would enjoy a margin boost to nearly $300 a tonne, the consultancy estimated. In the United States, petrochemical producers are poised to do even better despite all the challenges, seeing a 25% increase in propylene margins to $450 a tonne.

The petrochemical industry may have problems, but most of those problems stem from overcapacity and not from the transitional trends that would eventually kill the larger energy industry. And the industry is facing the problems and adapting to the changing realities. After all, survival is an imperative.

By Irina Slav for Oilprice.com

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