<article><p class="lead">Europe's refiners face more financial losses and permanent capacity closures in the coming months, as slow demand sharpens long-term pressures on the industry.</p><p>England, France and Germany introduced national lockdowns in early November, while their neighbours tightened restrictions on movement and social gatherings. Market participants expect gasoline demand to be 15-20pc lower in November and December than a year earlier. Middle distillate stocks were the highest in at least 30 years in the EU 15 and Norway in October, according to Euroilstock. Jet fuel is being put into floating storage in northwest Europe again.</p><p>The third quarter was the lowest point of the year for Europe's refiners. Northwest European diesel cargo margins to North Sea Dated crude fell to a 21-year low of $2.20/bl, compared with a $16.73/bl average in the third quarter of 2019. Eurobob oxy grade gasoline barges and jet fuel cargoes both fell to a discount to Dated.</p><p>BP and ExxonMobil reported losses in the third quarter, while Total reported a loss in its refining business in particular. They were joined by Spain's Repsol, Italy's Eni, Norway's state-controlled Equinor, Greece's Hellenic and Austria's OMV, among others. Margins have firmed marginally in the fourth quarter, but doubts remain over the short- and long-term profitability of European refining with diesel and gasoline margins near or below the $5-6/bl level of typical complex refinery operating costs. </p><p>The refining sector faces long-term structural overcapacity globally, but especially in Europe. The IEA in its most recent <i>Oil Market Report</i> said there would be 22mn b/d of excess capacity in the world next year, even after demand starts to recover. Refining capacity will overshoot expected demand by 27.5pc.</p><p>Europe's refiners are already reckoning with the need for a cull. Finland's Neste will permanently close its 55,000 b/d Naantali refinery and convert its 197,000 b/d refinery to renewable fuel processing. Total is converting its 93,000 b/d Grandpuits refinery for renewable fuels. Trading firm Gunvor has shut its loss-making 115,000 b/d Antwerp refinery with no view to restarting it. At least two refineries in the Mediterranean region are considering permanent closure, the director of Oil Analytics, Jan-Jacob Verschoor, said. </p><p>Complex refineries are less at risk, although minimal discounts for heavy crudes to light crudes have eroded their advantage. Phillips 66's 270,000 b/d Killingholme refinery in the UK has a particularly profitable coker unit. Refineries in central Europe can dominate local markets and earn higher margins. State aid is another lifeline. Saras' 300,000 b/d Sarroch refinery plays a key role in power generation in Sardinia and has been able to depend on the state's support in the past. </p><p>Independent refiners with smaller cash reserves are in the most danger. They are trying to sell the idea of a strong summer 2021 to investors in order to raise the capital they need to keep operating in the short term, but may struggle as ratings agencies pass increasingly sour judgment on their finances. Moody's downgraded OMV's outlook from stable to negative in March and Fitch did the same for Turkey's Tupras in April.</p><p>"If I were a potential investor looking at this, I would be sceptical," said Deloitte's refining industry analyst Teymur Baylarbayov.</p><p>The majors are trying to sell assets rather than close them, which can be an expensive and unpopular move. Long-discussed plans to sell off plants have been brought forward by this year's crisis. Total has agreed to sell its 110,000 b/d Lindsey refinery to the UK's Prax Group, and Shell will look to sell its 70,000 b/d Fredericia, Denmark, refinery in the next few years.</p><p class="bylines">By Benedict George</p></article>
