Refiners Enjoy Temporary Windfall Amid Tight Fuel Supply and Summer Demand Surge

Economic

Commodity

Summary:

Refining margins surged globally in May 2025 due to fuel supply constraints and peak seasonal demand, offering short-term gains for refiners....

Short-Term Profitability Returns Despite Structural Pressures

Oil refiners around the world are experiencing a temporary reprieve from recent profit slumps. Global composite refining margins climbed to $8.37 per barrel in May, their highest in over a year, reflecting a short-term supply-demand mismatch. While still far below the extraordinary margins seen in mid-2022, the recent uplift is significant given the sector’s earlier projections of a weak 2025. The uptick has been primarily driven by shrinking global refinery capacity — a consequence of permanent closures in the U.S. and Europe — alongside unplanned outages and rising summer fuel demand.

The paradox lies in the fact that refining margins have risen even as crude prices hit a four-year low in May due to faster-than-expected easing of OPEC+ output cuts. This decoupling underscores that refined product tightness is not simply a function of upstream supply but also downstream capacity constraints and logistics bottlenecks.

Supply Constraints and Inventories Drive Up Margins

A major contributor to this margin rebound has been the tightening of fuel inventories. According to JPMorgan, OECD-region fuel stocks dropped by 50 million barrels from January through May, signaling a substantial drawdown that aligns with peak summer transport and cooling fuel demand in the Northern Hemisphere. In parallel, refinery output disruptions due to plant shutdowns — such as those in Spain, Nigeria, and Mexico — further constricted the fuel supply chain.

Specifically, global diesel and gasoline supplies are both projected to contract in 2025, while demand for these key fuels either rises slightly or declines more slowly, creating a squeeze that lifts prices. Analysts from FGE and Rystad agree that this tighter balance is providing near-term relief for refiners, especially in Europe and North America, where many have long struggled with high operating costs and declining utilization rates.

Plant Closures Shift Market Dynamics

The impact of permanent closures is being felt more acutely now, especially with Europe’s Petroineos, Shell, and BP facilities winding down operations. In the U.S., LyondellBasell and other major players are also reducing refining capacity. These structural changes have slowed global net refinery capacity growth below product demand growth for the first time in years. Combined with outages like the Iberian Peninsula’s 1.5 million bpd loss in April, this has made existing operational refineries significantly more profitable in the short term.

Even newer projects like Nigeria’s Dangote and Mexico’s Olmeca refineries have suffered unexpected disruptions, limiting the expected cushion in global supply expansion.

Caution Ahead: Trade Tensions and Overproduction Loom

Despite the current momentum, industry analysts warn that these margins may not be sustainable. The International Energy Agency (IEA) forecasts that global oil demand growth will slow to 650,000 bpd for the remainder of 2025, down from near 1 million bpd in Q1. A resurgence of trade conflicts and tariff-related disruptions — such as those between the U.S. and China — could further erode consumer and industrial fuel consumption.

Moreover, the profitability of refining is likely to draw idle capacity back online, increasing output just as demand softens. This supply response could flatten or reverse current margin gains. Wood Mackenzie and veteran traders alike suggest refiners should lock in profits now through hedging, as the outlook beyond summer appears less favorable.

Refiners globally are benefitting from a narrow window of profitability due to tight fuel markets and strong seasonal demand. However, this rebound is unlikely to alter the longer-term trajectory of the refining industry, which still faces headwinds from electrification, evolving fuel standards, and geopolitical uncertainty. Strategic hedging, operational efficiency, and selective investment in newer, flexible capacity will be essential for refiners seeking to extend gains and remain competitive beyond 2025.

Source: Reuters

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Economic

OECD Trims Global Outlook As Trump Trade War Hits U.S. Growth_1

Global economic growth is slowing more than expected only a few months ago as the fallout from the Trump administration's trade war takes a bigger toll on the U.S. economy, the OECD said on Tuesday, revising down its outlook.

The global economy is on course to slow from 3.3% last year to 2.9% in 2025 and 2026, the Organisation for Economic Cooperation and Development said, trimming its estimates from March for growth of 3.1% this year and 3.0% next year.

But the growth outlook would likely be even weaker if protectionism increases, further fuelling inflation, disrupting supply chains and rattling financial markets, the Paris-based organisation said in its latest Economic Outlook.

U.S. President Donald Trump's tariff announcements since he took office in January have already roiled financial markets and fuelled global economic uncertainty, forcing him to walk back some of his initial stances.

Last month, the U.S. and China agreed to a temporary truce to scale back tariffs, while Trump also postponed 50% duties on the European Union until July 9.

The OECD forecast the U.S. economy would grow only 1.6% this year and 1.5% next year, assuming for the purpose of making calculations that tariffs in place mid-May would remain so through the rest of 2025 and 2026.

For 2025, the new forecast marked a sizeable cut as the organisation had previously expected the world's biggest economy would grow 2.2% this year and 1.6% next year.

While new tariffs may create incentives to manufacture in the United States, higher import prices would squeeze consumers' purchasing power and economic policy uncertainty would hold back corporate investment, the OECD warned.

Meanwhile, the higher tariff receipts would only partly offset revenues lost due to the extension of the 2017 Tax Cuts and Jobs Act, new tax cuts and weaker economic growth, it added.

Trump's sweeping tax cut and spending bill was expected to push the U.S. budget deficit to 8% of economic output by 2026, among the biggest fiscal shortfalls for a developed economy not at war.

As tariffs fuel inflation pressures, the Federal Reserve was seen keeping rates on hold through this year and then cutting the fed funds rate to 3.25-3.5% by the end of 2026.

In China, the fallout from the U.S. tariff hikes would be partly offset by government subsidies for a trade-in programme on consumer goods like mobile phones and appliances and increased welfare transfers, the OECD said.

It estimated the world's second-biggest economy, which is not an OECD member, would grow 4.7% this year and 4.3% in 2026, little changed from previous forecasts for 4.8% in 2025 and 4.4% in 2026.

Source: Yahoo Finance

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Stocks

Largest Fund Exodus Since 2007 Reflects Cautious Sentiment Post-Rally

Japanese equity markets experienced a significant capital pullback in the week to May 28, 2025, with equity funds recording $7.49 billion in net outflows — the most substantial weekly loss since July 2007, according to LSEG Lipper. The data highlight investor hesitation following strong equity performance in April and early May, spurred initially by easing tensions between the U.S. and China. However, concerns about Japan’s medium-term earnings outlook, alongside broader macroeconomic rebalancing strategies, have since triggered widespread selling.

Analysts attribute this exodus largely to domestic investors locking in gains after April’s buying opportunity. Life insurers and pension funds also engaged in rebalancing, shifting from equities to bonds to maintain portfolio ratios as stock prices climbed.

Yen Strength and Profit Uncertainty Add to Headwinds

The yen’s continued appreciation — up 10% year-to-date against the U.S. dollar — has become a key concern for export-heavy Japanese firms. A stronger yen diminishes overseas earnings when repatriated, reducing profit margins for large manufacturers and tech exporters. Reflecting this pressure, analysts have revised forward 12-month earnings expectations for Japanese corporations downward by 1.8% over the past month.

This currency-driven pressure adds to the uncertainty about the short-term potential for earnings growth, even as corporate governance reforms continue. According to Herald van der Linde of HSBC, while structural reforms — such as efforts to improve return on equity and enhance shareholder value — are progressing, they remain too incremental to spark near-term performance rebounds. Japan’s ROE still trails its global peers, deterring some international capital.

Domestic vs. Foreign Investor Behavior: A Divergence Emerges

Notably, the outflows were almost entirely driven by domestic investors, who withdrew $7.55 billion from local funds. In contrast, foreign investors showed tentative optimism, contributing a modest net inflow of $59 million. This disparity underscores the more cautious stance of Japanese institutions and retail participants, in contrast with selective foreign fund managers possibly seeking longer-term value opportunities.

Among the hardest hit were some of Japan’s most actively traded ETFs: the Daiwa iFreeETF TOPIX lost $2 billion, the Nikko Listed Index Fund TOPIX shed $1.92 billion, and the Nomura NF TOPIX ETF saw $1.61 billion in redemptions. These instruments, closely tied to Japan’s broad market index, were primary targets for liquidation amid waning near-term enthusiasm.

Fundamentals vs. Flows

Despite the heavy fund outflows, the underlying fundamentals of Japan’s equity market are not deteriorating sharply. Instead, the pullback reflects tactical repositioning in response to stretched valuations, currency pressures, and modest earnings downgrades. If the yen continues to strengthen and global trade uncertainty persists, we may see further corrections in Japanese equities. However, a stabilization in FX markets or stronger Q2 earnings surprises could quickly reverse sentiment.

In the medium term, Japan’s push for corporate transparency, capital efficiency, and improved dividend policies remains a long-term tailwind. The challenge lies in translating structural reforms into tangible profit growth, which will be key to regaining both domestic and international investor confidence.

Source: Reuters

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Commodity

Steel Sector Soars on Protectionist Push

Markets reacted swiftly and decisively on Monday after President Donald Trump announced a sharp hike in tariffs on steel imports, doubling the levy from 25% to 50%. The move immediately sparked a bullish rally in domestic steel producers, with Cleveland-Cliffs (CLF) soaring over 23%, Steel Dynamics rising more than 13%, and Nucor climbing 12%. The VanEck Steel ETF (SLX), which tracks the broader industry, gained more than 3%, signaling broad-based optimism within the sector.

Speaking at a rally in Pennsylvania, Trump justified the measure as a means to "further secure the steel industry in the United States." He framed the move as a continuation of his industrial strategy focused on reshoring manufacturing and strengthening U.S. supply chains. The timing aligns with a politically motivated effort to energize industrial states ahead of the election season, tapping into economic nationalism and employment preservation in legacy industries.

In a bid to soften the blow or offer reassurance, Trump also touted a “blockbuster agreement” involving U.S. Steel and Japan’s Nippon Steel. He described it not as a merger but as a “partnership,” claiming it would lead to the creation of 70,000 new jobs and keep U.S. Steel under American control without layoffs. However, details of this deal remain vague and face scrutiny from regulators and trading partners alike.

Trade Fallout and Global Repercussions

The European Union wasted no time in criticizing the decision, calling it a unilateral action that jeopardizes ongoing negotiations. EU officials said they were prepared to respond with countermeasures, potentially reigniting a tit-for-tat tariff war similar to the escalation seen during Trump’s first term. This highlights the broader geopolitical risk: while tariffs may bolster domestic producers temporarily, they also risk disrupting supply chains, raising costs for downstream industries, and straining diplomatic ties.

From a market perspective, steel equities are responding positively due to the expectation of reduced foreign competition and stronger domestic pricing power. However, these gains may be tempered in the medium term if retaliatory tariffs hurt U.S. exports or if input costs for manufacturers and builders rise. Investors are also watching closely for any macroeconomic fallout tied to global trade realignments, which could weigh on broader industrial demand.

Trump’s doubling of steel tariffs has provided an immediate jolt of confidence to U.S. steelmakers, as reflected in double-digit stock gains. Yet the underlying strategy may also sow deeper tensions with major trade partners and raise inflationary pressures in industries reliant on steel inputs. The market’s initial enthusiasm may give way to volatility as the global response unfolds and as investors reassess the broader economic implications of this aggressive protectionist turn.

Source: CNBC

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Asian Markets Resilient Amid China’s Manufacturing Shock

Despite a significant deterioration in China’s manufacturing sector, Asia-Pacific equity markets largely advanced on Tuesday. The Caixin/S&P Global Manufacturing PMI plunged to 48.3 in May, the weakest since September 2022 and well below forecasts. The contraction was driven by a sharp drop in new export orders, largely attributed to elevated U.S. tariffs and fading global demand. However, regional markets shook off the bad news, with the Hang Seng Index gaining 1.15%, the CSI 300 climbing 0.48%, and Australia’s S&P/ASX 200 rising 0.53% to near four-month highs.

This upward momentum suggests investors are cautiously positioning for policy responses or stimulus, even as the manufacturing weakness highlights the challenges facing China’s small- and mid-sized exporters.

Rising Tensions and Diverging Trade Outlooks

China responded firmly to U.S. accusations of breaching a temporary trade deal, instead blaming Washington for its own failures. The escalating rhetoric casts a shadow over the 90-day tariff truce signed last month and increases the risk of renewed confrontation. Meanwhile, Europe reacted sharply to Trump’s decision to double steel tariffs to 50%, describing it as undermining transatlantic negotiations and threatening retaliatory measures.

In contrast, U.S.-India trade relations appear to be warming. U.S. Commerce Secretary Howard Lutnick expressed optimism that a comprehensive trade deal with India is near, a sentiment likely to boost investor confidence in South Asia’s longer-term economic integration with Western markets.

Gold and Oil Rally as Safe Havens and Supply Risks Dominate

Gold prices posted their sharpest single-day gain in four weeks on Monday, jumping 2.8% to breach $3,370 before stabilizing amid dollar fluctuations. Mounting uncertainty over U.S.-China relations, a stagnating global economy, and geopolitical turmoil in Eastern Europe have reignited demand for safe-haven assets. While the precious metal experienced some intraday volatility Tuesday, investor sentiment remains tilted toward defensive positions.

Meanwhile, oil prices climbed more than 3% as OPEC+ opted to maintain a steady production increase of 411,000 barrels per day for July, easing fears of oversupply. The market also responded to falling U.S. rig counts, now at their lowest since 2021, and potential supply disruptions from Canadian wildfires. WTI rose to $62.85 per barrel, while Brent touched $64.83, with analysts projecting continued tightness in the short term.

Commodity Pressure: Base Metals and Iron Ore Slide

Unlike oil and gold, industrial commodities faced a pullback. Iron ore futures dropped 0.74% to $95.35 per ton, with similar losses seen in copper, aluminum, and zinc. The sharp contraction in China’s Caixin PMI spooked investors and triggered concerns over future materials demand. With China being the world’s largest consumer of industrial metals, any sign of manufacturing weakness sends immediate ripples through global supply chains and pricing mechanisms.

Asia-Pacific currencies showed mixed performance. The Japanese yen weakened as Bank of Japan Governor Ueda hinted at more interest rate hikes to counter price stagnation. Meanwhile, the offshore yuan slipped 0.17% as China’s economic outlook dimmed. In Southeast Asia, the Malaysian ringgit and Thai baht gained slightly, while the Singapore dollar weakened against a dollar index that swung amid shifting sentiment.

Tuesday’s market action underscored a complex global investment landscape. While China’s factory data sounded alarms for Asia’s growth outlook, risk-on appetite remained supported by potential policy stimulus, U.S.-India trade optimism, and strong commodity-linked equities. Yet with mounting trade tensions, fragile manufacturing data, and diverging policy signals across regions, investors are treading a narrow path between optimism and caution as the second half of 2025 begins.

Source: CNBC

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Private Sector Pain: Small Firms Bear the Brunt of Tariff Tensions

China's manufacturing sector stumbled in May, with the Caixin/S&P Global PMI tumbling from 50.4 to 48.3—the weakest reading in over two and a half years. The decline is not just statistically significant but economically revealing: it reflects the growing vulnerability of small- and medium-sized enterprises (SMEs) to geopolitical headwinds, particularly the escalating tariff regime revived by the Trump administration. Unlike the official PMI, which showed milder contraction, the Caixin index—focused on smaller, export-reliant firms—illustrates deeper fractures beneath the surface of China's recovery narrative.

According to Caixin Insight’s Wang Zhe, the contraction was driven by a simultaneous decline in supply and demand, with export orders falling steeply. This dynamic can be directly attributed to recent hikes in U.S. tariffs, especially on intermediate and finished goods from SMEs. The data suggest that the 90-day truce on tariffs agreed in mid-May may have come too late to arrest the sentiment-driven deterioration in factory activity. Smaller firms, less able to diversify their customer base and absorb shipping costs, are experiencing acute operational distress—evident in both reduced purchasing activity and employment cutbacks.

Policy Uncertainty and External Demand Weakness

Standard Chartered’s Becky Liu highlighted that while large corporations have diversified exposure and resilient export channels, SMEs are exposed directly to policy shocks. The latest downturn in external demand is compounded by broader global uncertainties, including U.S. fiscal policy debates and monetary tightening, which are likely to drag on consumer sentiment and business investment globally. If these trends persist, further weakness in Chinese exports—especially from SME clusters—should be expected.

Methodological Caveats and Divergence in PMI Signals

Interestingly, Bloomberg Economics notes the magnitude of the drop may partially reflect methodological quirks. The Caixin survey is smaller in sample size and applies different seasonal adjustments compared to the government’s PMI, which surveys more state-owned and large enterprises. Historically, Caixin readings have outpaced the official index due to export strength, making this reversal even more concerning. The May divergence points to a growing duality in China’s manufacturing recovery—one that benefits large firms while SMEs falter.

Looking ahead, sentiment on future output remains mildly optimistic, likely reflecting hope in policy support or easing trade tensions. However, analysts like Raymond Yeung from ANZ warn that without a turnaround in the domestic property sector, the broader industrial base may remain sluggish. Property, a key driver of steel, cement, and machinery demand, continues to show no signs of recovery, which could undermine any gains from improved trade dialogue.

While headline growth figures and official PMI data may suggest stability, the sharp downturn in Caixin’s private-sector manufacturing gauge exposes mounting pressures on China’s industrial base. The outsized impact on SMEs hints at rising structural imbalances, worsened by geopolitics and domestic demand weakness. Until either tariffs ease or significant domestic stimulus materializes, the near-term outlook for China’s private industrial sector remains fragile and skewed to the downside.

Source: Bloomberg

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Rising Debt Loads Put G7 Economies Under Investor Microscope

After years of tolerating heavy sovereign debt, global bond markets are increasingly reacting to what they see as fiscal overreach among G7 nations. From the U.S.'s downgraded credit rating to Japan’s faltering bond auctions, signals are emerging that investors are beginning to demand accountability and restraint—or higher yields. While a full-blown debt crisis remains unlikely, the trend marks a shift in how markets are pricing sovereign risk across major economies.

The U.S. is at the epicenter of these concerns, following Moody’s decision to strip the country of its last AAA credit rating. Market reaction has been swift, with a sharp selloff in April pushing 10-year Treasury yields beyond 4.5%. Investor skepticism has grown around President Trump’s new tax and spending bill, which is projected to inflate the national debt by $3.3 trillion by 2034.

Despite reassurances from Treasury Secretary Scott Bessent that the U.S. will never default, the sheer scale of deficit expansion has prompted warnings from industry leaders like JPMorgan’s Jamie Dimon, who cited a “crack in the bond market.” A potential regulatory adjustment to the supplementary leverage ratio (SLR) may restore some intermediation capacity among banks, but the underlying debt trajectory remains a structural concern for both foreign and domestic investors.

Japan: Cracks Emerge in Longstanding Debt Tolerance

Long insulated by strong domestic demand and central bank dominance, Japan is now experiencing cracks in its debt resilience. The country’s debt-to-GDP ratio—more than 200%—remains the highest among developed nations. But what’s changed is market behavior. A recent 20-year bond auction flopped, pushing 30-year yields up by 60 basis points in just three months.

The Bank of Japan’s reduced balance sheet exposure has played a critical role, as traditional buyers like life insurers and pension funds scale back amid low return prospects. With Prime Minister Shigeru Ishiba facing calls for stimulus via spending and tax cuts, concerns have intensified about the government's ability to maintain market confidence. While policymakers are weighing trimming super-long bond issuance, weak auction demand suggests that the risk may already be embedded.

United Kingdom: Policy Crosswinds Raise Fiscal Visibility

The UK is also vulnerable, with debt levels nearing 100% of GDP and 30-year gilt yields hovering above 5%. Upcoming announcements from Finance Minister Rachel Reeves on defense and healthcare spending, despite pledges of fiscal discipline, may raise further questions about debt sustainability. The IMF has urged the government to hold firm on borrowing reductions.

Analysts suggest that a premature end to Bank of England bond sales could offer near-term support to gilts. But with no major tax increases planned and public spending pressure rising, the UK faces a delicate balancing act between credibility and public expectations.

France: Political Stability Buys Time, But Fundamentals Lag

France has seen its risk premium over German bunds ease to 66 basis points, down from last year’s peak of 90. This moderation has been helped by more constructive EU-wide defense and fiscal cooperation narratives. Yet France’s fiscal position remains structurally weak. A July announcement of a four-year deficit reduction plan by Prime Minister Francois Bayrou could provoke internal political tension.

Notably, France has shown little improvement in debt metrics since the COVID-19 pandemic, as pointed out by Carmignac’s Eliezer Ben Zimra. Markets may react negatively if the proposed reforms are diluted or delayed.

Italy: From Laggard to Relative Outperformer

Italy has improved its position, thanks to enhanced creditworthiness and a surprisingly strong fiscal performance. The budget deficit fell to 3.4% in 2024, with projections of 2.9% by 2026—matching Germany. The spread between Italian and German 10-year bonds has narrowed to under 100 basis points, its tightest since 2021, indicating improved investor confidence.

While long-term debt challenges remain, Italy is benefiting from EU fiscal integration and better comparative metrics, especially versus France. This shift in perception has led to renewed investor flows into Italian debt.

Across the G7, fiscal issues are no longer background noise—they’re central to market behavior. With global bond markets less tolerant of unanchored spending, nations that fail to present credible consolidation plans risk facing higher borrowing costs and eroding investor confidence. While central banks and reserve currency status still provide buffers, market dynamics are clearly shifting. The coming quarters may see a divergence in sovereign bond performance based not just on macroeconomic strength, but also on credibility and coherence in fiscal policymaking.