26/07/09
European refinery economics shift back to road fuels
European refinery economics shift back to road fuels
London, 9 July (Argus) — European refinery economics are shifting back towards
road fuels as diesel and gasoline markets tighten and concerns over jet fuel
supply ease. Market participants expect the shift to encourage refiners to dial
back some of the jet fuel production increases made earlier in the US-Iran war
in favour of diesel and gasoline. European refiners boosted jet fuel production
in March-June as concerns over supply pushed jet fuel margins above $100/bl. But
tightening road fuel markets and softer jet fuel fundamentals are beginning to
reverse that trend. European diesel and gasoline values have strengthened in
recent weeks. Diesel cracks are around $70/bl , their highest in three months,
while gasoline cracks are at four-year highs of around $40/bl. In contrast, jet
cracks have fallen to around $60/bl. Russia, the world's second-largest diesel
exporter, announced a ban on diesel exports on 8 July , raising the prospect of
tighter global supply. Europe will now face greater competition for remaining
diesel cargoes, as Turkey and buyers in north Africa seek to replace Russian
supplies. The US could help fill some of Europe's diesel shortfall, although
Europe will face competition from Brazil for US cargoes. Diesel has priced above
jet fuel for the past three weeks, after moving above jet for the first time
this year . Argus Consulting expects the spread to remain in diesel's favour
over the coming months. Meanwhile, gasoline demand has picked up in Europe in
recent weeks, especially in the Mediterranean and Germany, traders said. Export
demand from Europe's secondary markets has also firmed, and shipments to Brazil,
Canada, Egypt, Libya and Syria are expected to rise sharply in July. Market
participants said demand is outstripping availability. Refiners have increased
blending activity in recent weeks, drawing down blending component stocks.
Naphtha prices have rallied, supported by demand from gasoline blenders and
petrochemical buyers, lifting naphtha cracks to a 10-year high. Jet fuel prices
remain supported by strength across the wider middle distillate complex, but jet
fundamentals look softer. Europe has coped with the loss of Middle Eastern flows
and supply concerns have eased. European jet fuel imports hit an eight-month
high in June , supported by record US and Nigerian deliveries. More jet fuel
from east of Suez is due to arrive in Europe this month, while Chinese jet fuel
exports are set to increase , supporting global balances. Spain's Repsol has
already begun prioritising diesel and gasoline production after previously
boosting jet fuel output. Refiners can typically shift a portion of output
between kerosine and gasoil pools. Refining margins for secondary units have
strengthened at the same time. Margins for an average hydrocracker, producing
diesel and gasoline at a 70:30 ratio, rose to a $30.46/bl premium to Ice Brent
crude earlier this week, Argus calculations show. Margins for a typical fluid
catalytic cracker (FCC), producing gasoline and diesel at a 70:30 ratio, rose to
a $23.42/bl premium. Both margins were trading at discounts to crude in early
June. Heavier naphtha-grade material will probably return to the gasoline
blending pool instead of the kerosine pool, according to one market analyst.
Some refiners had been taking larger kerosine cuts from petrochemical units ,
but this has probably also decreased now. A pivot away from jet fuel output
could leave the market exposed if supply tightens again. European jet fuel
inventories remain heavily depleted and will probably not rebuild until the new
year, according to Argus Consulting, leaving little cushion if supply gaps
re-emerge. By Amaar Khan and Atishya Nayak Send comments and request more
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