The refining industry is witnessing the end of the supercycle of huge profits and record margins that began with the post-pandemic surge in demand and war- and sanctions-related supply disruptions.

This year, weaker Chinese economy and fuel consumption, a wave of new refining capacity in the Middle East and Africa, and underwhelming demand in developed economies have depressed refining margins to multi-year lows.

Profits at U.S. refiners have been much lower this year as refining margins slumped from record highs in the previous two years.

The end of this year’s summer driving season led to weak margins across Asia, while weaker fuel demand and economic growth in China also weighed on refining profits.

Refining margins across Asia fell in the first week of September to their lowest level for this time of year since 2020, which could lead to more curbs on run rates at Asian refiners, including in China.

Refining margins in Europe are also under pressure, and reports have it that Repsol in Spain and Eni in Italy are considering cutting run rates.

Gasoline profit margins in Europe averaged $12.10 per barrel in August, a plunge of 61% compared to the same month in 2023, per LSEG data cited by Reuters.

Diesel margins are even weaker, with August profit margins down to their lowest since December 2021.

In Singapore, the complex refining profit margin and the gauge for Asia’s refining profits slumped this week to the lowest for the season since 2020, when the pandemic was depressing demand.

Massive new refineries, including Africa’s biggest in Nigeria, the Al Zour refinery in Kuwait, and Duqm in Oman, are also weighing on the profits of smaller refineries, especially in Europe.

Earlier this month, the owners of the Grangemouth refinery, Scotland’s only crude processing facility, confirmed the plant is set to close in the second quarter of 2025, as it has been struggling to compete with the new complex facilities in Asia, Africa, and the Middle East.

Source: OILPRICE

Nominal trend growth anchors 10Y Bund yields to 2-3% range

As a starting point, we compare Bund yields to trend nominal growth, which historically provides a rough but robust anchor of interest rates. Since the introduction of the euro, Bund yields have closely followed the smoothened path of nominal growth. Only since the global financial crisis and subsequent euro debt crisis did this relationship break.

Even during much of the post-GFC period, the moving average of nominal GDP remained between 2% and 3%, and is in our view a reasonable range for long-term rates. The wedge between 10Y yields and nominal GDP during this period can be explained by extraordinary circumstances causing a sustained demand shock. First we had the banking crisis and then the sovereign debt crisis, while austerity was the principle guiding global governments.

Trend growth suggests 2-3% is reasonable range for 10Y Bund yield

Broader fiscal support decreases downside risks to rates

Governments have learned from past mistakes and the political backing for fiscal support during economic downturns appears to be much broader since. Where traditionally right-wing parties strongly opposed running deficits, Covid-19 showed that the willingness of counter-cyclical fiscal policy is now much stronger. And more recently, Draghi’s plea for more investment aligns well with this movement.

In effect this can have important implications for rate markets, as monetary policy will no longer be the primary tool used to address demand shocks. In the aftermath of the euro crisis, the European Central Bank was pushed towards negative rates and other unconventional tools because fiscal austerity measures were suppressing demand. More willingness for fiscal support should shift up the probability distribution of policy rates in the future and also means that future inflation will, on average, be higher.

As such, we see more upside risk for inflation going forward, and yet markets don’t seem to be pricing in a risk premium for this. The average inflation since 2004 is around 2.1% in the eurozone, which aligns exactly with the current 5Y5Y forward inflation swap.

Broader fiscal support decreases downside risks to rates

In addition, where demand shocks can be addressed by monetary policy, supply shocks will remain a challenge. The inflation spikes from supply chain issues or the war in the Ukraine are two recent examples. If anything, such inflationary supply shocks can become more common against a backdrop of ageing populations and deglobalisation. The ageing population limits the labour supply and deglobalisation makes it even more difficult to shift production across borders.

Bonds are bad portfolio hedge against more frequent supply shocks

Survey data from the eurozone also shows that labour supply is increasingly limiting business, making the economy more vulnerable to supply shocks. More frequent supply shocks not only increase bond yields through inflation risks, but they also push yields up structurally through the term risk premium.

Supply shocks are characterised by low growth and high inflation, which impact both equities and bonds in a negative way. Bonds therefore do not provide an effective hedge, as they would during demand shocks (due to falling inflation), and higher yields in turn will be demanded by investors. The correlation between the STOXX equity index and Bunds may remain higher in the future, which would reduce the attractiveness of bonds in a diversified portfolio – hence the term risk premium potentially ending up structurally higher.

Increasing supply constraints may keep bond-equities correlation elevated

More upside risks to the 10Y Bund yield than priced in

Within our range of 2-3% based on our nominal growth forecasts, we expect the 10Y Bund yield to converge closer to the top of the range due to an increasing term risk premium. Besides the arguments on supply shocks becoming more common, we also highlight QT and ECB cuts will increase the term risk premium going forward.

Quantifying the term risk premium is difficult, but our analysis combined with historical excess return estimates (see box) sees a fair value 10Y Bund yield of around 2.8%. This implies a 2Y10Y term spread of around 40bp.

Given these fair value estimates, we see the 10Y Bund yield back at 2.6% by the end of 2025, much higher than Bloomberg consensus. Also forwards price in a significantly lower 10Y by the fourth quarter of 2025 of 2.2%.

ING forecast for 10Y Bund forecasts for end of 2025 well above average

In terms of opportunities, we think fixing in EUR payers now is a good timing. EUR rates might nudge lower in the near term due to US recession risks, but the balance of risk is clearly tilted towards higher yields in our view. A relative trade to capture the build-up of the term premium would be a 5Y10Y curve steepener (see trade ideas publications on our GMR website for more detail). Furthermore, the long-term inflation risks appear underpriced and therefore paying 5Y5Y inflation swaps seem to provide good value too.

Estimating the term risk premium and associated term structure

Realised excess returns for holding 10Y Bunds versus a shorter dated risk-free rate (1Y Bund) is a good starting point for estimating the term risk premium. The equation below is the standard method of calculating excess returns (in logged terms).

   Excess returnt = 10Y(10)t-1 – 9Y(9)t – Y(1)t-1

But to complicate matters, this would strongly overestimate the risk premium due to the structural decline of the “neutral” policy rate since the 90s. To adjust for this, we first subtract the returns that can be attributed to the change in markets' expectations of the neutral rate, which we proxy with a 1Y tenor three years forward.

   Adjusted excess returnt = 10Y(10)t-1 – 9Y(9)t – Y(1)t-1 – 9Δ1Y3Yt

The adjusted excess return for the period 2000-2024 is 1.2% (without adjustment this would be 2.0%). One can see in the table below that the unadjusted method would lead to an overestimation of the QE period and an underestimation after Covid.

The excess return is a total return, and is therefore comprised of both a carry and roll down component. By fitting a Nelson-Siegel curve to our forecasts we estimate the entire curve and calibrate this to obtain an expected excess return of around 1.0% for 10Y Bunds (whereby roll down to 9Y is included). This produces a 2Y10Y spread of approximately 40bp.

Decomposition of total 10Y Bund returns

The United States is dragging its feet on crypto, and despite recent hopes, the election won’t likely change this in the short term, says Fiona Murray, the managing director of Ripple Asia Pacific. 

But there’s still a chance for it to catch up, Murray said.

Speaking to Cointelegraph at Token2049 in Singapore, Murray said the bulk of the innovation in Ripple’s business was happening in Singapore and not in the US. She said that a “lack of open-mindedness” had driven many crypto founders to Asia and other countries in pursuit of fairer conditions. 

She believes the APAC region has provided a “stable environment” with a good deal of core infrastructure that enables healthy crypto development. 

“The banking partners in Singapore, like DBS, are really at the forefront, and they’ve been encouraged by the regulators to work with responsible Web3 companies. So it’s not just regulation,” she said, referring to DBS Bank, the largest bank in Southeast Asia.

“You then have to have a supportive banking community, and beyond that, the infrastructure and the rails, and the organization in general. So the US is so far behind right now, but it could catch up,” Murray added. 

Donald Trump may have become the first former US president to buy a burger with Bitcoin, and Democrats could be warming up to crypto, but Murray holds doubts that the upcoming election will be an easy fix for the US crypto industry.

“I think it’s more than the elections [...] you’d have to enable all the banks to support Web3 communities and grow from there,” she said. 

Still, Murray believes clarity across regulations and infrastructure is on the way for the US — it’s just a matter of time. 

“Once that clarity is there and the infrastructure is there, if we were able to see the big banks move into this space, the number of assets that you could tokenize and custody, that would really move the needle,” she said. 

Murray’s comments come as the US Securities and Exchange Commission appears to be laying the groundwork for a potential appeal against Ripple Labs in its ongoing case with the firm, with the regulator agreeing to receive delayed payment of a $125 million fine. 

A federal judge ordered Ripple Labs to pay $125 million as a civil penalty on Aug. 7 for allegedly using its native XRP cryptocurrency as an unregistered security to raise funds. 

Ripple Labs CEO Brad Garlinghouse lauded the ruling as a “victory for Ripple, the industry, and the rule of law,” given that the court reduced the SEC’s proposed penalty by 94%. 

Source: COINTELEGRAPH

The cryptocurrency industry will continue to grow, regardless of which candidate wins the U.S. presidential election this November. This is because cryptocurrency has emerged as a major player in election funding, leading to expectations that more favorable policies will be established, according to a report released by the Upbit Investors Protection Center.

Upbit is Korea’s largest coin exchange, operated by Dunamu.

The report highlighted the cryptocurrency-related pledges and positions of each candidate, predicting that, regardless of who wins the election, the growth trajectory of the industry will remain consistent, although the pace may vary.

“If Democratic presidential nominee Vice President Kamala Harris, who is expected to continue President Joe Biden’s policy direction, wins, the cryptocurrency industry is expected to see gradual growth within a regulatory framework,” the report suggested.

“On the other hand, if Republican presidential candidate and former President Donald Trump wins, the volatility of cryptocurrencies could increase significantly.”

Citing data from U.S. market research firm Morning Consult, the report noted that 22 percent of Americans were investing in cryptocurrencies as of last year, making them a voter base that cannot be ignored. This is prompting each presidential candidate to show pro-cryptocurrency tendencies in an apparent effort to win over these voters.

The report underscored that one of the most notable aspects of this presidential election is the sponsorship from cryptocurrency-related companies.

According to Washington-based nonprofit research group OpenSecrets, cryptocurrency companies contributed $119 million to federal election campaigns this year, accounting for 43 percent of the total. This was a significant increase from $4.6 million in 2022.

Currently, the leading contributors are Coinbase and Ripple. These companies are backing a blockchain-focused super PAC called Fairshake, which supports candidates across the political spectrum whose positions align with the crypto industry’s interests.

Unlike regular PACs, which support or oppose specific politicians or legislation, super PACs can raise and spend unlimited funds from individuals and organizations, provided they do not directly contribute to a particular candidate or party.

Since Fairshake has emerged as one of the wealthiest super PACs in this election, it is anticipated that policies and legislation favorable to the cryptocurrency industry will be further strengthened in the future.

Source: Koreatimes