March 2021 Refining Short-Term Outlook: Strong improvement in the US and China tempered by setbacks elsewhere
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.
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