Potential Headwinds for Refining Stocks in 2022

The refining stocks have experienced a prosperous year, fueled by a surge in demand for gasoline and diesel amid a global shortage of these products. However, the outlook for next year seems less certain.

Significantly, two refineries that had encountered prolonged delays are now poised to significantly boost production, adding approximately 1 million more barrels per day of fuel into the market.

Mexico and Nigeria are the homes of these ambitious new refineries, which are finally ready to enter full operation after an extensive start-up process that had left investors skeptical about their opening.

In a recent analysis, Tudor Pickering Holt analyst Matthew Blair comments, "These two refineries, which have faced significant delays and cost overruns, now seem tantalizingly close to completion."

While the additional capacity could potentially slow down or even reverse the gains made by refining stocks, it could also impact gasoline prices as it contributes to the already ample global supplies of gasoline.

The new refinery in Nigeria has been constructed by Dangote Group, a predominantly privately-held conglomerate. It has already commenced partial production and is on track to generate around 650,000 barrels worth of oil products including gasoline, diesel, and jet fuel by November.

On the other hand, the Mexican refinery is under the ownership of the state oil company Petróleos Mexicanos (Pemex) and is projected to produce 340,000 barrels of fuel by year-end. Notably, approximately half of this output will be gasoline.

These impending developments in the refining industry suggest that next year could present more challenges for refining stocks and potentially impact gasoline prices globally. As investors and observers wait for further updates, the market will be closely monitoring the progress of these two crucial refineries.

Global Refining Capacity and the Impact of New Refineries

The total global refining capacity stands at approximately 100 million barrels per day, as reported by the International Energy Agency. However, around 20% of this capacity is currently offline or unusable. Despite this, an additional refining capacity of about 1 million barrels will soon be available, further complementing the existing output of 83 million barrels of oil products being produced daily.

This upcoming increase in capacity from two new refineries alone will surpass the average annual capacity growth observed between 2015 and 2019, which stood at about 800,000 barrels per year. The significance of this development highlights the overall slowdown in refinery capacity growth.

The COVID-19 pandemic further exacerbated the situation as many refineries were forced to shut down due to unprofitability. In fact, for the first time in three decades, the net global capacity fell in 2021. While the United States' capacity remains below the levels seen in 2020 (19 million barrels per day), a gradual recovery is underway. Currently, it has climbed back to 18.3 million barrels, partly due to the expansion of an Exxon Mobil refinery. However, it is worth noting that the U.S. has not witnessed significant new refinery constructions in many years.

The emergence of new refineries in Nigeria and Mexico may cause harm to existing oil refiners across the globe, including those in the U.S. This is primarily because oil operates within a global market context. Nigeria, for instance, currently imports over 400,000 barrels of gasoline daily due to limited domestic refining capacity. However, with the new refinery project, it aims to reduce imports to around 200,000 barrels or even fewer by 2025, according to S&P Global. Consequently, overseas refineries that have been supplying fuel to Nigeria will experience a decline in demand.

Looking towards the future, it is anticipated that cracks - a measurement of margins used for refiners - will decrease to $12 per barrel for gasoline and $28 per barrel for diesel by 2024. This projection contrasts with the figures of $19 and $32 respectively for this year.

In conclusion, with the introduction of new refineries and the fluctuations in global capacity, the refining industry is experiencing significant changes. These developments will inevitably shape the competitive landscape and impact margins in the coming years.