TotalEnergies and Neste, two major European oil refiners, have cautioned about the potential for decreased profit margins due to declining demand. This comes after a period of strong profits following Russia's invasion of Ukraine.

TotalEnergies, the largest European refiner, reported a 34% decrease in operating income for its refining and chemicals business, largely due to lower profit margins from processing crude oil into fuels like diesel, gasoline, and jet fuel. The benchmark European refining margin marker also dropped by 37% in the second quarter.

The European Union's ban on oil imports from Russia, a major source of diesel, had briefly boosted European refining. However, the start-up of new refineries in Africa and the Middle East, along with slower economic activity in Europe, has put renewed pressure on the sector.

TotalEnergies expects this pressure on margins to persist into the third quarter, as global refining margins have been significantly impacted by low diesel demand in Europe and market normalization following the disruption in Russian supply.

Refining margins are returning to their pre-war levels, according to TotalEnergies CEO Patrick Pouyanne.

"Margins are back to where they were before the last two remarkable years ... We have come back to reality," Pouyanne told analysts.

BP, Shell, and Exxon Mobil recently cautioned that diminished refining margins would adversely affect their second-quarter financial performance, which will be disclosed next week.

Furthermore, U.S. oil refiners are anticipated to report significantly reduced earnings for the second quarter due to an underwhelming summer driving season.

UNCERTAINTY

Neste, a Finnish refiner, announced its first net loss in ten years on Thursday. The company attributed this loss to lower diesel and biodiesel prices, as well as planned maintenance at its Porvoo refinery. Additionally, Neste revised its annual renewables margin downward for the second time this year.

"The uncertainty in the global economic outlook and geopolitical situation continues to create market volatility ... the refining market continues to be impacted by geopolitical tensions," Neste said in its results.

On Wednesday, Repsol, a Spanish energy company, reported a significant decrease in refining margins during the second quarter compared to the preceding three months. This decline was primarily attributed to reduced gasoline prices and increased costs associated with crude feedstock.

In response to these results, analysts at RBC Capital Markets downgraded Repsol’s rating from “outperform” to “perform,” citing a challenging market environment. While crude oil prices have been supported by production cuts implemented by the OPEC+ group of producers, the analysts highlighted that new refinery expansions and subdued demand for products have exerted pressure on refining margins.

"We believe the outlook is likely to remain more muted into 2025, which effectively ends an extraordinary multi-year period for Repsol's downstream earnings," they said in a note.