RPT-ROI-Iran war ushers in oil refining golden era. It won’t last: Bousso

The combined impact of the two conflicts on refining profitability has been dramatic. The refined product shortage has left Big Oil with enormous pricing power and encouraged operators to run plants at full capacity. U.S. refineries, which emerged as the world's largest fuel suppliers during the conflict, operated at 97% of capacity in the week to July 24, well above their long-term average of around 90%. BP's refining-indicator margin, a gauge of global refining profits, climbed to $30 per barrel in the second quarter from $17 in the first quarter and $12 a year earlier. The indicator has averaged $42 per barrel so far in the third quarter. Exxon posted downstream profits of $5.5 billion in the second quarter, its strongest result since 2022, driven by record diesel production, while Chevron's downstream earnings climbed to $4.9 billion, their highest level this decade. Shell reported adjusted earnings of $2.5 billion for its products division, the highest this decade, as its refining network operated at a utilisation rate of 102% during the quarter. TotalEnergies Chief Executive Patrick Pouyanné summed it up neatly when he told analysts late last month that the company’s refining segment had performed in "an exceptional way." BP reports earnings on Tuesday. As a result, Western oil giants’ refining capacity shrank dramatically. Combined refining volumes for BP, Chevron, Exxon Mobil, Shell and TotalEnergies fell from 16.4 million barrels per day in 2005, representing around 22% of the global total, to 10.4 million bpd last year, or roughly 13% of worldwide crude processing, according to Reuters Open Interest calculations. Shell has led the retreat, reducing its interests in refineries from 40 to just seven over the period. But the refining environment has improved considerably in the past year, thanks to a spike in military conflict in several oil-rich regions. First, there’s Iran. The combination of the months-long effective closure of the Strait of Hormuz – which has limited refiners’ access to crude – and Tehran’s attacks on refineries throughout the Middle East have sent refining margins for gasoline, diesel and jet fuel to record highs. The loss of Middle Eastern crude forced refineries, particularly in Asia, to cut operating rates. While China has enormous crude stockpiles, it chose to scale back refining activity aggressively and halt fuel exports to offset its sharp reduction in crude imports. Together, these disruptions removed roughly 5 million barrels per day, or around 6%, of pre-war global refining output in the second quarter. Global refinery runs averaged around 78 million bpd, the lowest level since the depths of the COVID-19 pandemic in 2020, according to the International Energy Agency. Meanwhile, months of relentless Ukrainian drone attacks on Russian energy infrastructure have sharply reduced Russia's refining output, forcing Moscow to ban diesel exports. That announcement sent diesel prices soaring. Bumper oil refining profits triggered by the Iran war are turbocharging Big Oil's earnings, breathing new life into a business many investors had largely written off. The sector looks poised to produce unusually strong returns for several years, but long-term structural changes in oil consumption mean refining’s star will likely fade quickly. Despite occupying a critical position in the global energy supply chain, refining has long been the least glamorous corner of the oil business. Western oil majors have steadily retreated from the sector over the past two decades, deterred by high operating costs, notoriously volatile margins, rising carbon costs and growing competition from state-backed refiners in the Middle East, Africa and Asia. That retreat accelerated in the late 2010s, particularly in Europe, as governments and companies increasingly bet that rapid electric vehicle adoption would curb fuel demand by the 2030s, reducing the need for new refining investment. Most of the immediate pressures supporting these refining margins are likely to ease – the question is how quickly. A sustainable resolution to the U.S.-Iran conflict involving a full reopening of the Strait of Hormuz and the eventual recovery of Chinese refining activity would help loosen fuel markets meaningfully, but when that might occur is anyone’s guess. What’s clear is that the industry's problems cannot be repaired immediately. Fixing damage to dozens of refineries in the Middle East and Russia will take months, and in some cases years. In the meantime, global spare refining capacity remains exceptionally thin. There’s also reason to be positive on the demand side of the equation. The Iran war has revived concerns about energy security. Many governments are thus expanding strategic storage facilities for both crude oil and refined fuels to protect against future supply shocks. Governments need to start by simply refilling inventories depleted during the conflict. Global oil stocks fell by 5.1 million barrels per day in the second quarter and are forecast to decline by a further 2.2 million bpd in the third quarter, according to U.S. Energy Information Administration estimates. Rebuilding inventories of diesel, jet fuel and gasoline will likely take years, creating persistent demand. Alan Gelder, senior vice president for refining at consultancy Wood Mackenzie, expects refining margins and utilisation rates to remain strong through the end of the decade, supported by continued growth in oil demand and a limited pipeline of new refining projects. But the boom masks a deeper fragility. Today's windfall profits are being generated by war, damaged infrastructure and scarcity, not by a structural improvement in the industry's underlying fundamentals. Refiners are benefiting because the world has lost capacity faster than demand has disappeared. But that might not be the case for long. Several countries with limited domestic refining capability are now reassessing whether they need more local processing capacity. Australia, for example, is already considering such plans. Over time, those investments could create a new wave of capacity and eventually lead to oversupply. The oil majors understand this reality. A few years of exceptional margins may slow the decline of the refining sector. But they are unlikely to reverse it.

RPT-ROI-Iran war ushers in oil refining golden era. It won’t last: Bousso

Big Oil posts stronger downstream results

Western majors have shrunk refining exposure

Refining profits surge on war-related disruptions

Margins may stay strong, but the structural decline remains

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