Oil Refining Sector Faces Uncertain Future
Profits Plummet as Fuel Demand Slows
The U.S. oil refining sector is experiencing a significant downturn, driven by forecasts of softer fuel demand and concerns over potential tariffs on crude imports. After two years of exceptional profits, refiners are now facing declining margins and lower earnings expectations.
New Refining Capacity Weighs on Profits
The addition of new refining capacity has led to a surplus of fuel, causing prices to drop and margins to shrink. As a result, shares of major refiners have fallen this year, with analysts slashing their fourth-quarter earnings estimates by 24% since the start of the quarter.
Crack Spreads Collapse
The U.S. gasoline futures crack spread over the cost of West Texas Intermediate (WTI) crude has plummeted to a one-year low, while the ultra-low sulphur diesel futures crack spread has eased to a near two-month low. This decline in crack spreads is a clear indication of the sector’s struggles.
Refinery Utilization Rises
Despite the challenges, U.S. refining utilization has averaged 90.3% in the fourth quarter, up from 87.6% in the same quarter last year. However, this increased utilization has not been enough to offset the decline in profits.
Weaker Demand Ahead
Signs of slowing economic activity in the U.S. and China, the world’s largest oil consumer and importer, respectively, are weighing heavily on oil and fuel markets. The International Energy Agency has increased its 2025 global oil demand growth forecast, but this growth is expected to be led by emerging economies in Asia, which are not strong markets for U.S. refiners.
Global Gasoline Demand to Peak
Global gasoline demand is expected to peak this year at around 28 million barrels per day, driven by surging electric vehicle adoption and improving vehicle efficiency, particularly in China. This decline in demand will further exacerbate the challenges facing U.S. refiners.
Tariff Uncertainty Looms
Investors are also uncertain about U.S. government policies, particularly the potential imposition of tariffs on oil imports. Tariffs would have a significant impact on refiners, forcing them to pay more for their feedstock and leading to higher prices and slower demand.
Challenging Environment Ahead
The combination of weaker demand, declining profits, and tariff uncertainty has created a challenging environment for U.S. refiners. Until there is clarity on the direction of economic growth and tariffs, margins are likely to remain weak. However, some Trump policies, such as the rollback of support for electric vehicles, could provide some support for fuel demand.
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