The U.S. refinery sector is bracing for significant changes, as experts predict capacity could drop by almost 3% by the end of 2025. This forecast stems from various factors, including falling global demand for crude oil and the growing competition within the market, particularly due to geopolitical tensions and economic shifts.
The International Energy Agency (IEA) has reported substantial weakening of oil demand, especially from China—the world's largest oil importer. This decline is notable against the backdrop of the post-pandemic recovery of 2022 and 2023, which had been characterized by soaring gasoline and diesel demand. During this peak, refiners enjoyed wide profit margins, often referred to as the "platinum era" of oil refining.
By mid-November 2024, the price of West Texas Intermediate (WTI) crude oil futures was hovering around $71 per barrel, roughly 10% down from earlier summer prices and significantly below the peaks of approximately $120 per barrel seen back in May 2022. This shift raises questions about the sustainability of refining operations amid decreasing demand and market uncertainty. The IEA has flagged the contraction of Chinese oil demand as more pronounced than anticipated, falling 1.7% year-on-year this past July, which starkly contrasts with the previous year’s impressive growth rate of nearly 10%.
Adding to the challenges faced by refiners, sanctions imposed on Russian oil products following the country’s invasion of Ukraine have resulted in tight supply, creating heightened competition for crude oil. This has affected refinery margins and overall operations, putting pressure on the already strained sector.
Looking toward the near future, oil analysts are closely monitoring market developments to predict potential trajectories for oil prices. They speculate how OPEC+ producers may react by reinstig some previously-cut production to stabilize their market shares against non-OPEC competitors. Despite fluctuading geopolitical issues, the continued decline in refined product demand is reshaping the refinery market, leading many to question whether the industry can recover its previous profitability.
The latest trends also reveal sharp drops not only in crude prices but also substantial reductions in refined product prices, including diesel, which has experienced declines of about $7-8 per barrel—levels last seen several years ago. Industry experts recognize the convergence between oil prices, refinery margins, and demand as key drivers of market dynamics.
Interestingly, not all news is grim for refineries. The demand for naphtha, used primarily for petrochemical production, remains resilient. The rebound of petrochemical demand has begun to show promise, with refiners seeking crudes with greater light-end yields to maximize their output of naphtha. Nevertheless, the overall yield of naphtha from crude oil is relatively modest, comprising around 8% of the crude barrel on average. This limitation means the recent uptick in naphtha prices provides only limited relief for overall refinery margins.
Compounding the challenge, the drive toward cleaner energy solutions and electric vehicles is curtailing the growth and stabilizing the demand for traditional petroleum products. This has created significant competition for fossil fuels, exacerbated by broader economic trends moving away from oil consumption. Analysts continue to anticipate varying demand patterns, particularly for transport fuels, which may give early indications of future price trajectories.
While the 2022-2023 period marked the peak for refining profits, the outlook heading toward 2025 and beyond indicates potential continued volatility. Market experts remain alert as they analyze trading activity, seeking to glean insights about upcoming shifts. Whether the refinery market can adapt to these changing realities or if it has entered more prolonged uncertainty remains to be seen. The evolution of the refining sector will require innovative strategies to thrive amid these challenges and changes, testing the resilience of refiners as they confront the intricacies of today’s energy market.
