Opinion: Better times ahead for refining?

We were waiting last month to see whether Opec+ would agree to postpone the start of a tapering mechanism that would eventually see 2.2mn b/d of crude being released back to the market. We are firm believers in the process of market management, which fundamentally underpins our forecasts of global supply-demand and oil prices. So we were not surprised when the alliance agreed to a postponement at its meeting on 5 December.

The group actually went a little further than anticipated. Earlier expectations of another one-month delay were trumped by an agreement to hold back until April. The latest timeframe also allows the unwinding process to extend until the end of September 2026, rather than the end of 2025. It also includes an agreement from the UAE to only gradually introduce the permitted 300,000 b/d increase in its quota, — starting in April 2025 and running through to the end of September 2026. It is unlikely to have been a coincidence that Saudi Crown Prince Mohammad bin Salman visited Abu Dhabi immediately ahead of the meeting.

Assuming full quota compliance and that the new schedule is fully implemented — but not allowing for any compensation yet to be agreed — this new arrangement goes a long way to ensuring that 2025 brings a balanced and stable market. Our balance shows a small deficit in the first quarter, followed by much less oversupply through the rest of the year than might have been the case if the alliance had started to return its barrels earlier.

But the market becomes significantly oversupplied in 2026 should producers move forward with the scheduled unwinding of production cuts. This is a stark reminder of the fundamentals that confront the Opec+ alliance — not just in 2026, but further out as well. Global demand growth is weakening in the face of widespread moves to decarbonise the energy system. But non-Opec+ supply — fossil fuels and renewables combined — will continue to grow strongly, by over 5mn b/d in 2024-28. This will outstrip the likely increase in global oil demand, leaving Opec+ to face the harsh reality of the fading call on its crude.

It might at times be a struggle, but we remain confident that the producers will do what is necessary to keep the market balanced and prices supported. If only things were so simple downstream, where — after a spell of stellar results — refiners are suddenly contending with sharply lower margins. Here, there is no industry body to try and regulate supply-demand dynamics — indeed, any attempt to create one would swiftly be condemned as an oligopoly and an infringement of competition laws.

Refining margins have certainly fallen sharply in 2024. Average global margins across all configurations were 50-55pc lower than in January this year and 75-80pc lower than in January last year (see graph). A fall of this magnitude was always on the cards, given how high margins had climbed in 2022-23 following the disruption to global product trade caused by sanctions on Russian exports. Currently, margins are broadly in line with pre-Covid levels — and actually somewhat stronger for simpler configurations because of the current strength in fuel oil prices.

But there is a body of opinion that the refining sector could benefit from a much tighter market. Since 2019, almost 7mn b/d of CDU capacity has closed, a further 1.1mn b/d is set to close in 2025-26, and there is a strong chance that more closures will be announced. This seems to reflect a generally gloomy perspective on refining — especially in the mature Atlantic basin markets, where oil demand is most likely to have already peaked.

But some commentators are now suggesting that perhaps too much capacity has been closed, and too quickly — leaving a market environment that is actually supportive for those willing to remain in the game. Greater refining sector interest in mergers and acquisitions tends to support — or at least feed off— this view.

The present difficult macroeconomic environment has made it difficult to maintain the decarbonisation momentum and projections of when global demand might peak have slipped. This is adding fuel to what sounds like an increasingly upbeat refining narrative.

For the moment, we remain sceptical that the refining sector is on course for any sort of boom. The recent disruptions to global refined product trade patterns have boosted prices and margins, but they have also served to mask the fact that the last two years have brought with them a significant net increase in capacity. And net capacity is poised to climb further still — the industry is adding more capacity than it is retiring (see graph).

In 2026, global oil demand is expected to be running some 7.8mn b/d higher than it was back in 2016, whereas installed CDU and splitter capacity is only expected to be around 4.4mn b/d higher. This would certainly suggest a tighter refining environment. But this ignores the growing role of non-refinery sourced products in meeting global oil demand. Over the same period, the use of non-refinery sourced products — such as biofuels and NGLs that are derived from gas processing — is expected to grow by close to 5mn b/d, which is equivalent to almost two thirds of the increase in total demand.

A very different picture starts to emerge when you take this into account. Instead of outstripping net capacity additions, the cumulative growth in demand for refined products now lags the growth in installed capacity (see graph). Further closures would act to head off this emerging capacity surplus. But the growing perception that there might be better times ahead for refining could encourage new entrants to the sector and prolong the operating life of assets that otherwise would have been retired.

This article was first published in Argus Consulting's Argus Fundamentals, a monthly report examining global oil supply-demand dynamics now and in the future. The report is published every third Wednesday of the month.

Change in global oil demand vs CDU capacity mn b/d

Global refining margins by key configuration $/bl

Changes in global CDU capacity: Firm plans mn b/d