The International Energy Agency Friday warned weak demand and high stock levels would depress global refinery runs for the next six months.
"Demand revisions, weak middle distillate cracks and reports of bulging product inventories...suggest a further painful period of weak margins as refiners adjust operating rates to the 2.8% decline in demand now expected for this year," the energy watchdog for the Organization for Economic Cooperation and Development said in its widely watched monthly oil market report.
Global refinery runs were expected to average 71.2 million barrels a day in the second quarter, a decline of 2.9 million barrels a day compared with the previous year, the IEA said. The forecast was revised down 1.1 million barrels a day from last month's report.
Weakness in global refining activity should extend into the third quarter, the agency said.
"Lower OECD imports will also be necessary to balance the lower demand forecasts," the IEA said. "This could translate into non-OECD export refiners bearing a greater share of the lower crude runs."
Worsening margins for middle distillate products - like diesel, heating oil and jet fuel - could also put pressure on refinery throughputs, the IEA said.
"The continued weakness in middle distillate cracks could undermine activity levels in Asia but also potentially Europe, while the more gasoline-biased U.S. refining industry may benefit from the rebound in gasoline cracks," the IEA said.
"Nevertheless, U.S. margins are anticipated to remain under pressure from excess Atlantic Basin gasoline supply potential."
China may boost its refining activity this quarter given its higher runs in February and the commissioning of the 240,000 barrel-a-day Huizhou refinery in the coming months, the IEA said. Government price reforms implemented late last year have also created a more attractive pricing environment for state refiners to raise their output, the IEA said.
"However, higher runs will necessitate higher exports if demand doesn't start to recover in short order, pushing China toward more of a merchant refiner role and adding further pressure to product cracks and benchmark refining margins as other refiners will need to scale back runs to contain product inventories," the IEA added.
Amid its gloomy forecast, the agency also highlighted stronger-than-expected refining activity in February when global crude runs stood at 72.3 million barrels a day, up from 71 million barrels a day in January. However in the OECD member countries, February refinery runs fell to their lowest level for the month since 1995.
"Despite the leaden skies under which much of the world sits economically these days, February data have proved surprisingly strong, suggesting either demand isn't as weak as reported or that the resulting build in product inventories will be the precursor of additional margin weakness in the months to come," the IEA said.