Refining Margin

In Asia, refining margins are around 50% higher than the five-year seasonal average, suggesting healthy demand.¹⁾

From the demand side, there is no real story to push oil higher with refinery margins continuing to weaken.²⁾

Around the world, refining margins — the difference between the cost of crude and the value of the gasoline, diesel and other petroleum products — have surged to records, due to soaring demand combined with a lack of refining capacity.

Refining margins are the difference between petroleum product prices and the cost of crude oil, usually quoted in dollars per barrel. They are the main earnings drivers for the downstream segment of the Oil & Gas industry. ¹⁾

For the world’s largest petroleum product market—the US— refining margins can be highly volatile. While crude oil prices fluctu- ate every day, petroleum product prices can be sticky (i.e., it can take longer for gasoline prices to change versus oil prices). ²⁾

The demand side is also becoming a concern, which is evident with the broader weakness seen in refinery margins since the end of the northern hemisphere summer. Weaker margins suggest possibly weaker end-use demand, which ultimately could feed through to weaker crude oil demand from refiners.

However, the refining margin is the most important earnings driver of the independent R&M sub-industry. ³⁾

Refining margins are the most influential driver of downstream (refining and marketing) earnings. Similar to the natural gas market, refining margins differ depending on the regional market. While crude oil costs are generally the same globally, petroleum product prices differ greatly. ⁴⁾

The primary quantitative factors influencing refining margins are: ⁵⁾

• Petroleum product demand ⁶⁾
• Crude oil prices ⁷⁾
• Refining utilization ⁸⁾
• Petroleum product inventories ⁹⁾
• Petroleum product imports ¹⁰⁾
• Light/heavy spread ¹¹⁾

Thus, refining margins generally fall when crude oil prices rise, and vice versa. ¹²⁾

It’ s important to note crude oil costs are just one side of the equa- tion for refining margins (the other being product prices). So over the long term, crude oil prices and refining margins have an inconsist- ent relationship. In the short term though, this relationship is more relevant. ¹³⁾

With the Northern Hemisphere’s peak summer fuel demand season just around the corner, oil traders are acutely focused on refining margins and whether any improvement is looming.³⁾

If margins don’t pick up as we enter summer, it could paint a further bearish picture for crude.⁴⁾