Saras says no over capacity in European refining

Italian refiner Saras said the future is promising for European refining due to stronger margins, improving demand, high refinery complexity, growing oil production and the stronger dollar.

Speaking at a business update, Saras executive vice president Dario Scaffardi said he wanted to correct a "sense of surprise and incredulity" among some investors over the company's positive view of European refining. The closure of a string of European refineries since 2009 was due to substandard, smaller, and less-complex refineries being unable to compete in the wider market place said Scaffardi, not simply due to an excess in supply.

"There is no over capacity, just wrong capacity," he said.

Although Europe's financial crisis had seen falling consumption of products, Scaffardi said 2015 was likely to prove "an inflection point for demand." Consumption was beginning to grow in the EU and Saras would be able to supply much stronger demand growth from north Africa, parts of the Middle East and Turkey. Rising freight rates mean refining competitors from further afield, such as India, would no longer be able to leverage any advantage in labour costs, with Saras able to supply its local markets more competitively.

Scaffardi said the company's 300,000 b/d Sarroch refinery in Sardinia was already seeing strong returns on producing gasoline, because of a worldwide shortage of high quality octane products, and the firm expects gasoline margins to remain strong in 2015 and into 2016. The firmer demand meant Saras has already sold its production for 2015 and had boosted gasoline runs to around 30pc of output, from 24pc in 2014. The outlook for diesel margins was "a bit more bumpy", but still significantly stronger than those seen between 2009 and 2014.

Lower oil prices were also aiding the outlook, with Saras saying it could see little upside to crude prices in the next two years. The return to 4mn b/d of Iranian crude into the market by the end of 2016 – should sanctions on the country be successfully lifted following the accord signed with the US, EU and Russia over its nuclear programme - would be central to capping the oil price said Scaffardi. Further volumes were also likely to come on-stream in the US, Canada and South America and only major geopolitical disruption could upset this outlook, Saras said.

Another help to European refiners was the weakness of the euro against the dollar. While Saras was able to sell its products in dollars its fixed costs remained in euros, boosting profitability. The company had also made the most of losing a lot of its traditional supply of crude from Libya, due to the country's political upheavals. Saras can now run 35 different crude grades in its refinery, as opposed to 14 around 2009, said Scaffardi.

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