TotalEnergies refining margins hit three-year low as Europe's downstream outlook sours

France’s TotalEnergies warned of a slide in its third-quarter European refining margins, as a correction in oil products cracks from the record highs of recent years pressured downstream profits.

In a quarterly trading update Oct. 15, TotalEnergies said European refining margins averaged $15.40 per metric ton in Q3, flagging that its downstream results are expected to “sharply decrease” in line with global price falls.

The company’s reported refining margins marker -- calculated using public market prices and costs representative of its refining system -- was down 66% from Q2, marking the strongest quarterly reduction in over five years and back-to-back quarterly declines through 2024.

Like most global refiners, TotalEnergies profited from soaring margins after Q2 2022, when the shock of the Russia-Ukraine war dislocated oil supply chains and drove margins into triple-figure territory.

However, with redrawn trade flows now operating more smoothly and economic headwinds putting pressure on consumption, refined product prices have steadily declined through 2024 and appeared to draw a sharp line beneath a brief “golden era” for the refining business.

TotalEnergies last reported a lower refining margins marker in Q3 2021 at $8.80/t, while the full-year average in 2021 before Russia’s invasion of Ukraine was $10.25/t.

Declining profits have put growing pressure on refiners to recalibrate production from high volumes over summer, when producers rushed to eke out returns from margins that remained strong by historical norms. S&P Global Commodity Insights analysts reduced their Q4 refinery run forecast by 50,000 b/d due to early signs of economic run cuts, while European utilization rates in 2024 are expected to ease to 82% over October and November from 83% in September.

Autumn maintenance schedules at refineries, including at Denmark’s Frederica and the UK’s Pembroke in Northwest Europe, were expected to mitigate any supply overhang, although tepid demand caused inventories to pile up at the Amsterdam-Rotterdam-Antwerp hub through September. While gasoil stocks have gradually declined through early October, European growth outlooks remain weak and a mild winter could limit support from heating oil consumption.

A string of weak downstream results has been visible across Europe’s refining heavyweights, including BP, Shell and OMV, with margins in some cases dropping to lows not seen since the global pandemic.

The downswing could usher in a new cycle of capacity reductions for the European downstream sector, analysts have warned, expecting utilization reductions to be followed by more announcements of refinery closures toward the turn of the decade.

Upstream pressure

In the upstream segment, TotalEnergies expects its total hydrocarbon production to total 2.4 million b/d of oil equivalent, down slightly from the 2.45 million boe/d reported the previous three quarters and representing a multi-year low.

The company attributed lower production to disrupted supplies in Libya, which lost around half its crude output in September due to a political crisis that took key oilfields offline. Unplanned shutdowns at the Ichthys LNG project in Australia also negatively impacted output, although the ramp-up of Brazil’s Mero 2 project provided some uplift.

TotalEnergies expects LNG to lead its oil and gas production growth through 2030, it said Oct. 2, projecting around 3% annual growth to the end of the decade, thanks in part to major projects in Brazil, Suriname, Angola, Oman and Nigeria launched in 2024.

TotalEnergies projected its integrated LNG results to exceed $1 billion in Q3, citing an average Q3 LNG price of $9.91/MBtu on the quarter and a 6% improvement on Q2 values.