UBS doubles refining margin expectations as supply shocks intensify

Investing.com - UBS on Friday raised its 2026 European integrated refining margin forecast from $7.5 per barrel to $14.8 per barrel, more than doubling the estimate. The bank noted that damage to Middle Eastern energy infrastructure has led to the shutdown of over 3.5 million barrels per day of refining capacity in the region.

The broker estimates that at least Bahrain’s 400,000 barrels per day Sitra refinery, as well as Kuwait’s Mina Abdulla and Mina Al-Ahmadi refineries (totaling about 800,000 barrels per day), may require months of maintenance.

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The affected capacity accounts for about 30% of the region’s total refining capacity, which is approximately 12 million barrels per day.

UBS stated that the spot level of European integrated margins has already tested the high point of around $33 per barrel in 2022.

The most strained pressure point is jet fuel. UBS has raised its Q2 jet fuel margin forecast from $20 per barrel to $65 per barrel, noting that about 25% of Europe’s jet fuel consumption is supplied through the Strait of Hormuz.

The broker said: “If the issue is not quickly resolved, even considering national reserve releases, some fuel products may still face shortages in the next two to three months.”

Diesel margins are expected to reach $50 per barrel in Q2, up from the previous estimate of $20 per barrel, then fall back to $35 per barrel for the full year 2026. UBS has raised its 2027 European integrated margin forecast by 42% to $6.0 per barrel.

UBS also raised its 2026 US integrated margin forecast from $16.6 per barrel to $26.1, and its Asia-Pacific integrated margin forecast from $4.8 per barrel to $11.0.

Export restrictions in other regions complicate this disruption. UBS pointed out that China has announced a ban on refined product exports, and Russia is actively discussing similar measures.

The broker’s earnings estimates for European companies with high refining exposure are raised by an average of about 28%, with target prices increased by approximately 22%.

Despite these upgrades, UBS has upgraded the ratings of Tupras and Orlen from “Sell” to “Neutral,” citing their sensitivity to refining margins and European natural gas prices. Due to higher-than-average volatility, both are considered core zone exceptions, with Tupras at 25% and Orlen at 15%, compared to a standard threshold of 6%. As of March 19, Orlen traded at PLN 133.20, and Tupras at TRY 253.25.

UBS emphasized the increased likelihood of government intervention, noting that Hungary and Greece have already implemented fuel price or margin caps, while Turkey has cut taxes. The broker stated that further export controls and windfall profit taxes remain possible risks.

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