McKinsey: Overall Profitability of Oil, Oil Products Decreased in 2024

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McKinsey: Overall Profitability of Oil, Oil Products Decreased in 2024

The overall profitability of oil and oil products decreased in 2024, continuing a sustained decline from record-breaking highs in 2022, when margins more than doubled historical averages. That’s what was stated in a McKinsey report on commodity trading sent to Rigzone last week, which was penned by Joscha Schabram and Roland Rechtsteiner, who are both […]

The overall profitability of oil and oil products decreased in 2024, continuing a sustained decline from record-breaking highs in 2022, when margins more than doubled historical averages.

That’s what was stated in a McKinsey report on commodity trading sent to Rigzone last week, which was penned by Joscha Schabram and Roland Rechtsteiner, who are both partners in McKinsey’s Zurich office.

The report noted that oil price volatility also declined in 2024 compared with the previous year, but highlighted that “various factors, including recent geopolitical developments in the Middle East, led to increased volatility in the third quarter of 2024”.

McKinsey’s report also stated that 2024 “was an especially challenging year for many asset-backed traders operating in the refining space”.

“Increased global refining capacity, coupled with relatively weak demand for petroleum products in the United States and other OECD nations, pushed down refining margins,” it said.

“2024 also saw closures announced for several refineries in Europe and the United States, paired with new capacity coming online in regions with growing demand, such as the Middle East and Africa,” it added.

The McKinsey report went on to warn that “several factors could drive an uptick in crude price volatility in 2025”.

“Recent years have seen constrained upstream capital expenditures, which could limit crude supply in the short term,” it noted.

“Geopolitical developments remain a major source of volatility, with crude pricing and availability affected by ongoing developments in Eastern Europe and the Middle East,” it said.

“At the time of this article’s publication, proposed tariffs on imports to the United States could reshape crude flows, potentially rerouting a small portion of some Canadian crude to new markets in East Asia via the expanded Trans Mountain Pipeline,” it continued.

The McKinsey report stated that the challenging operating environment for refiners provides merchant trading companies an opportunity to increase their exposure to downstream assets.

“Leaner operating structures, lower overhead costs, and commercial trading acumen can empower these players to engage in profitable asset-backed trading activity,” it said.

“Some independent traders have already begun to engage in M&A, deploying cash accumulated during the recent boom to purchase stakes in European and Asian refineries and international retail – a trend that will likely accelerate in the near future,” it highlighted.

“Incumbent asset-backed players will likely continue leveraging commercial and operational levers to extract the full value from their downstream portfolios,” it went on to state.

Looking at the longer term, the report said “a gradual consolidation of margins in oil and oil products is likely, with demand potentially plateauing at some point between 2025 and 2035”.

“In the short term, data show China moving away from its role as the primary driver of global demand (a mantle that will likely be taken up by non-OECD economies such as Brazil, India, and the Middle East),” it added.

A bio page on Schabram hosted on McKinsey’s site notes that he “co-leads … [McKinsey’s] Commodity Trading as well as Risk and Resilience Service Line with a particular focus on power and gas markets”. A bio page on Rechtsteiner hosted on McKinsey’s site states that he “leads McKinsey’s commodity risk and trading work on a global basis”.

McKinsey describes itself on its site as a global management-consulting firm committed to helping institutions in the private, public, and social sectors achieve substantial and lasting improvements in their performance.

The company focuses on several industries, including oil and gas, electric power and natural gas, and chemicals, its site shows. McKinsey was founded in 1926 and has consultants in more than 60 countries, according to its site.

To contact the author, email [email protected]

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