Summertime blues for Europe’s refiners

Author Ben Winkley

European summer weather may just be beginning, but an Indian summer looks to be coming to a close for the continent’s refining sector.

European summer weather may just be beginning, but an Indian summer looks to be coming to a close for the continent’s refining sector.

These have been heady days for European oil refiners. After so long on the ropes, the sector has been one of the great beneficiaries of the lower oil price environment. As falls in product prices have lagged falls in crude, those refiners that survived the lean years have been making hay now the sun is shining.

Refinery margins in Europe have reached their highest in more than two years, according to the IEA’s latest Oil Market Report (OMR). The average Brent crack spread is closing in on $9/bl, having been slinking around below $4/bl as recently as December. Total's European refining margin indicator (ERMI) rose to $47.10/t ($6.41/bl) in the first quarter, a sevenfold increase from a year earlier and over 70pc higher than the previous quarter.

Although capacity reductions have been substantial — and a new round of closures in France could be imminent — European refiners managed seven consecutive monthly increases in throughputs before a slight fall back in March, the IEA says.

But there’s a chill on the way. Higher US and Latin American runs should begin to send surplus US products to Rotterdam, squeezing European margins in the process. In the other direction, the Ruwais refinery in the UAE and the Yanbu refinery in Saudi Arabia — both with a capacity of 400,000 b/d — will also direct products to Europe once they have reached capacity.

If this all comes to pass, European refiners could see margins driven back below their cash operating costs, Macquarie Bank says. No surprise then, that companies including Total, Italy’s Eni, and Kuwait’s state-owned KPC are working to shed some of the at least 1.5mn b/d of excess capacity that still remains in Europe.

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