Global Gasoline Margins Drop Due to Slow Summer Driving Season: Analysis

Oil Refiners Struggle with Lower Than Expected Gasoline Demand

Oil refiners this summer have faced an unexpected challenge: falling gasoline demand during what is typically the peak driving season. This decrease in demand comes despite increased production and has disrupted years of record profits for refineries globally.

Unanticipated Drop in U.S. Gasoline Demand

In the United States, the world's largest gasoline market, refineries anticipated a rise in demand which never materialized. Data shows U.S. gasoline demand at 9 million barrels per day (bpd) in early June, down 1.7% from last year and the lowest seasonal level since 2021. This mismatch between production and consumption has raised concerns about global crude oil demand.

Financial analysts from BMI, a unit of Fitch Solutions, recently cautioned that the fall in profit margins might push refiners to reduce output. Brent oil prices have dropped approximately 9% from mid-April highs, hitting around $83 a barrel, influenced by OPEC+ concerns about adding more supply to a sluggish market.

Declining Refining Margins Across Regions

Asian refiners have already reduced their operations due to weak gasoline market conditions, and similar retrenchments are anticipated elsewhere. In late May, Asian refiners' profit from gasoline plummeted, and overall refining margins in Singapore dropped to below $2 a barrel, compared to $5 a barrel the previous year. European gasoline refining margins also saw a drop, falling to $10.80 a barrel in mid-June, the lowest since January. Likewise, the U.S. gasoline crack spread fell under $22.50 a barrel for the first time since February.

Actions Taken by Refiners

Notable actions include Taiwan's Formosa Petrochemical Corp reducing its crude distillation volume plans for June from 480,000 bpd to 440,000 bpd due to market conditions. U.S. refiners, responding to similar pressures, cut their run-rates to 95% in early June, a slight reduction but an important first step since April. Analysts suggest further reductions may be necessary if demand continues to falter.

Factors Behind Reduced Demand

The drop in demand is attributed to several factors including an increase in air travel over driving, more fuel-efficient vehicles, and the rising use of electric cars. This has led to a buildup of U.S. gasoline stockpiles, which reached 233.5 million barrels by early June, the highest seasonal total since 2021.

Overwhelming Supply Challenges

Despite current challenges, there are expectations that margins could improve as U.S. gasoline consumption typically increases over the summer. However, the market has persistently underperformed. Additional pressures come from new refineries such as Mexico's Olmeca refinery and Nigeria's Dangote refinery, which have faced delays but are adding to supply pressures once operational. Moreover, enhanced capacity from Middle Eastern, Indian, and Chinese refineries has contributed to a surge in gasoline exports from these regions, further stressing the market.

Indian and Chinese refiners, benefiting from discounted Russian oil, have increased their output. This has strained Asian gasoline margins, with exports from these countries holding firm throughout the summer. In May, Chinese gasoline exports rose to 350,000 bpd, and Indian exports reached 360,000 bpd, marking significant monthly increases.

The aggregate effect of these dynamics suggests that the peak for gasoline profit margins was likely already reached in April and is not expected to improve significantly over the summer, according to industry analysts.