Refining Margins Soar as Global Oil Product Markets Tighten

Refining margins in the U.S, northwest Europe, and Asia have jumped to two-year highs as diesel and gasoline markets tighten with no sign of immediate relief.

Refinery closures in recent years, planned maintenance after the summer, unplanned repairs due to outages, and Ukrainian attacks crippling Russia’s oil product exports have tightened the refined petroleum markets everywhere.

Forecasters and traders expect a glut on the crude market to depress further benchmark crude futures going into 2026, but the strength in gasoline and middle distillates makes the oversupply narrative less bearish than crude supply and demand suggest.

Refining margins in North America and Asia are now at their highest since late 2023 and early 2024, while European margins are even higher as the market braces for a significant disruption early next year when the EU will ban, effective January 21, imports of products made from Russian crude oil, per the July sanctions package against Russia.

In this package, the EU finally moved to close the Russian oil loophole, which currently allows EU imports of fuels processed from Russian oil, including in India, a key buyer of Russian crude until now.

In another Russia-related development, the incessant Ukrainian drone attacks on Russian refineries are reducing processing and export capacity, leaving Moscow’s customers of diesel and other fuels, such as Brazil, for example, scrambling for alternative supply.

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The U.S. sanctions on Rosneft and Lukoil, which produce and trade a large part of Russia’s fuels, are also stressing the global product flows as buyers and traders scramble to avoid secondary sanctions implications.

Further south, Africa’s newest and biggest refinery, the 650,000-barrels-per-day Dangote plant, faces operational setbacks, unplanned outages, a strike, and suspected sabotages by workers amid restructuring.

Then there is the decline in capacity in the West as refineries have been permanently closed in Europe and the U.S. over the past few years amid weak profitability, while large integrated complexes were added in the Middle East and Asia.

As a result, margins began to strengthen in as early as the third quarter, allowing U.S. refiners to beat earnings estimates and the oil and gas supermajors to post solid results with the recovery of their downstream businesses.

Refining margins further rose in the fourth quarter and are expected to remain strong in the near term.

Diesel margins are rallying to two-year highs on a combination of planned and unplanned maintenance and intensifying sanctions on Russia, analysts at Oil Price Information Service (OPIS) said last week.

“Unlike previous spikes, the recent increase in diesel prices has been exclusively driven by downstream tightness,” they said.

“While crude is in ample supply, refinery throughput is not keeping up with product demand.”

The U.S. sanctions on Lukoil and Rosneft have led to product supplies tightening significantly in the Atlantic basin, as the usual buyers of Russian diesel, such as Brazil, now have to compete for non-sanctioned barrels elsewhere.

Fuel supplies are also tightening on lower processing rates in the U.S., where crude throughput has dropped to 15.6 million bpd this month from the highs of 17.5 million bpd in the summer, OPIS said.

The International Energy Agency (IEA) noted that global refinery runs slumped by 2.9 million bpd from September to 81.5 million bpd in October. But these are set to increase sharply towards year-end to capture higher margins and middle distillate demand as the heating season in the northern hemisphere begins.

“Middle distillate markets appear particularly tight with limited potential for relief. Depleted product stocks and a spate of unscheduled refinery outages lifted European and Asian refining margins to two-year highs, while US Mid-continent margins doubled in a matter of days following a refinery outage,” the IEA said in its monthly report for November.

The strength in the middle distillate market is expected to incentivize refiners to maximize yields on middle-of-the-barrel products, ING’s commodities strategists Warren Patterson and Ewa Manthey wrote in a note on Wednesday.

“The strength in refinery margins certainly makes a more bearish view of the crude oil market less likely,” they added.

“Global refinery margins are astronomical,” Eugene Lindell, head of refined products at consultancy FGE NexantECA, told Bloomberg last week.

“The signal you’re giving the global refining system, no matter where the refinery is located, is to just run flat out.”

By Tsvetana Paraskova for Oilprice.com

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