Europe’s refiners must stay nimble to avoid margin squeeze


Europe’s oil refiners will have to carefully manage production, possibly even turning to diesel, to sustain margins as high oil product inventories and uncertain gasoline demand growth threaten a model that has been lucrative over the past three years.

European energy companies, including Royal Dutch Shell, Repsol and Statoil, reported big rises in first-quarter margins as refinery outages worldwide counterbalanced high oil product stocks.

The summer, and the U.S. drivers it typically woos to the road, are often a surefire bet for Europe’s units, which churn out much of the gasoline that ends up in American auto engines.

But U.S. gasoline demand in January and February fell year-on-year, suggesting the market may have trouble repeating last year’s record volumes, according to Energy Information Administration data, while meteoric gasoline demand growth in India has begun to flatten.

In Europe, April refinery runs are already 640,000 barrels per day (bpd) higher than last year. U.S. and Asian units are also increasing runs – and looking to export.

Analysts JBC expect a potentially substantial downward correction in refining margins in the second half of the year, meaning refiners will have to be nimble to sustain profits.

“The topics are the same: It looks like operational performance, reliability,” said Matti Lehmus, executive vice president of oil products for Finnish refinery Neste.

Several forecasts, including from consultants FGE and Bank of America Merrill Lynch, are expecting a rebound in diesel demand growth this year as industrial activity picks up around the globe, following a demand contraction in 2016.

Demand for diesel, used in heavy equipment in industries such as mining and oil production, is more closely linked with economic growth than other fuels, while airline demand for jet fuel, also from the distillate pool, is also strong.

“One year ago, it was clearly gasoline driven. Now it’s both (diesel and gasoline)… and we are slightly below 2016 on inventory,” Lehmus said.

For European refiners who are quick enough to react, demand growth for distillates, which has lagged behind that of gasoline, offers opportunities.

“Tourism in Western Europe is up. That’s having a demand impact across the distillates barrel, both for transport and for jet [fuel],” Stephen George, chief economist at consultancy KBC said. “With the oil patch revitalised, you will see more demand for distillates.”

Refiners and analysts said Europe’s refiners will also have to remain shrewd in their oil purchasing and capitalize on the plethora of physical cargoes offered in the region despite production cuts orchestrated by the Organization of the Petroleum Exporting Countries.

“In general, the quantity of crude that has been removed by the OPEC cuts has been replaced,” a source at a Mediterranean refiner told Reuters.

Refiners are accessing a wide variety of crudes at competitive prices, including from Kazakhstan’s giant offshore field Kashagan, U.S. tight oil and Libya and Nigeria, both of which are exempt from OPEC cuts.

“In such an environment, refining margins have remained extremely healthy,” the source said.

Source: Reuters

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