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Even though the number of new daily reported cases of COVID-19
has risen steadily over the past month, so too has the number of
vaccinations being administered. Market sentiment is certainly
optimistic, with most stock indices at or above their pre-pandemic
highs. Meanwhile, global fuel demand continues to improve and,
importantly, the massive refined product surplus that built up
during the first months of the crisis has fallen back into
"manageable" territory. As a result, IHS Markit has revised upward
its short-term outlook for product cracks and refinery
profitability since last month.
That said, the refining margin divergence that arose between the
US and the rest of the world around the beginning of the year has
continued to widen. Benchmark US net refining margins have clawed
back into positive territory - though they remain below normal -
whereas their counterparts in NW Europe and Singapore have simply
moved sideways.
As with most things in the world over the past year, the
refining sector recovery is taking its cues from COVID-19 - and the
nature of each market's response to the pandemic. For example, the
US vaccination campaign has been among the best in the world,
underpinning expectations for a strong summer demand season.
Together with the fact that the US refining industry has also been
relatively aggressive cutting capacity (and the forced stock
drawdown caused by Winter Storm Uri), this expectation has pushed
many US margins back to where they were before the pandemic. In
contrast, a sharp resurgence in cases is weighing on the demand
outlook - and thus refinery margins - in Europe.
The fragmented nature of the recovery is all but certain to
continue since there is dramatic disparity among markets in terms
of their vaccination campaigns. Certainly, the stellar progress
being made by the world's two largest demand markets—China and
the United States—bodes well for the global outlook. Of course,
as the recent surges in places like India and France show, the
COVID-19 pandemic is not over yet.
