Refining's Golden Years Are Over. September's Margin Slump Shows New Capacity Meeting Flat Fuel Demand
From 2021 to 2023, refining was among the best businesses in the energy sector. Pandemic closures had removed capacity, demand recovered faster than expected, and the loss of Russian product exports to Europe in 2022 widened margins further. Refiners in the United States, Europe and Asia enjoyed unusually strong earnings. According to the US Energy Information Administration, refinery margins measured by the 3:2:1 crack spread have been below their five-year (2019 to 2023) average since the spring of 2024, and fell further in late summer and early autumn.
The 3:2:1 crack spread is a simple proxy: the value of two barrels of gasoline plus one barrel of distillate, minus the cost of three barrels of crude. The EIA uses regional crude benchmarks, Brent for New York, Los Angeles and the Amsterdam-Rotterdam-Antwerp hub, Light Louisiana Sweet for the US Gulf Coast, West Texas Intermediate for Chicago and Dubai for Singapore. The first half of the explanation is weak product demand, especially for diesel. In the United States, the EIA reports that product supplied of distillate fuel oil from June to September 2024 averaged 6 per cent less than in 2023 and 8 per cent less than in 2019.
Outside the United States, the EIA points to slowing economic activity in China and Europe. It also notes the structural forces steadily reducing petroleum fuel use across much of Asia and Europe: electric vehicles, biofuels and LNG in trucking. Al-Zour and Duqm are export-oriented and well placed to supply Asia, East Africa and Europe. The EIA reports that US operable atmospheric distillation capacity reached 18.4 million barrels per calendar day at the start of 2024, 2 per cent more than a year earlier.
The United States is now the world's largest exporter of motor gasoline, according to the EIA, supplying more than 16 per cent of global exports. The EIA's explanation for this export position is that US refinery capacity and utilisation have grown while domestic gasoline consumption has not. Refining has always been cyclical, and low margins have been followed by recoveries before.