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Refining profits slump on adverse fundamentals

“The worldwide refining business is experiencing great difficulties – and some say there is no relief in sight, Martin Quinlan writes

THE FOUR-YEAR run of strong profitability in refining, which started in early 2004 and ran out of drive last year, has turned into a decisive slump. Escalating consumption of oil products in the largest markets worldwide has reversed into a decline, just at the time when a large volume of new refining capacity has been starting up.

Accordingly, utilisation rates have declined and have taken refining margins with them. With much new capacity under construction or in advanced planning – despite some high-profile cancellations recently – the industry’s fundamentals are forecast to remain adverse for years rather than months.

Refining economics follow the classic pattern for capital-intensive manufacturing, in which fixed costs are high, but marginal costs – the costs of processing additional barrels – are low. Accordingly, a decline in utilisation rates brings an increase in overall per-barrel costs.”

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