UBS raises global oil refining margins outlook amid delays and closures

UBS has significantly revised its global oil refining outlook, forecasting tighter supply balances and higher margins due to widespread project delays, such as India's Barmer plant, and refinery closures, including Benicia and potentially UK's Lindsey. The bank now anticipates tighter oil balances by 200,000 bpd in 2025 and 700,000 bpd in 2026, while also raising demand growth projections for refined products by 100,000 bpd for 2025 and 600,000 bpd for 2026. Consequently, UBS increased its European composite refining margins forecast by 14% for FY2025 to $5.7/barrel and 13% for FY2026 to $4.2/barrel, underscoring market vulnerabilities and the need for further capacity rationalization, particularly in Europe, to restore equilibrium.

Analysis

UBS has materially upgraded its outlook for the global oil refining sector, forecasting tighter supply-demand balances and higher profitability through 2026. The bank's analysis points to a significant supply-side constraint, with oil balances expected to tighten by 200,000 barrels per day (bpd) in 2025 and a more substantial 700,000 bpd in 2026. This is driven by specific capacity reductions, including the delayed startup of India's 180,000 bpd Barmer plant to early 2026, the scheduled closure of the 170,000 bpd Benicia refinery, and the potential shutdown of the 110,000 bpd Lindsey refinery. Compounding this supply squeeze, UBS has simultaneously raised its demand growth projections for refined products to 400,000 bpd for 2025 and 600,000 bpd for 2026, citing improved GDP forecasts and a weaker dollar. Consequently, UBS has increased its European composite refining margin forecast by 14% to $5.7 per barrel for FY2025 and by 13% to $4.2 per barrel for FY2026. However, the analysis also highlights market fragility, noting that geopolitical tensions have exposed vulnerabilities in Europe’s middle distillate supply and can fuel significant margin volatility, as seen in Q2 2025.

Key Decisions for Investors

• Given the forecast of tightening supply and rising demand, investors should assess potential long positions in well-positioned oil refining equities, particularly those with significant European exposure where margin forecasts have been raised substantially.
• It is prudent to monitor announcements related to further refinery rationalization, as UBS notes that over 3 million bpd of capacity may need to close by 2027 to rebalance the market, creating both risks for inefficient operators and opportunities for survivors.
• Investors should remain vigilant of geopolitical risks and their potential to induce sharp margin volatility, as market tightness, especially in European middle distillates, could amplify the impact of any supply disruptions.