Europe's bitumen markets face both supply and demand pressures in the year ahead.
Changing crude slates at several European refineries and a focus on producing more lucrative oil products will weigh on regional production in 2023, as will a likely demand slippage caused by anticipated cuts in funding for road project work, driven by inflationary cost pressures.
Supply in Europe will be constrained by EU and UK embargoes on Russian crude and product imports. Besides the direct impact on Russian bitumen imports into Europe, European countries that stop taking Russian crude altogether, notably Germany, will produce less bitumen themselves as they switch to much more expensive crude feedstocks, including US or North Sea grades.
Bitumen producers in Europe also face the prospect of continued cost pressures from elevated natural gas prices — another side effect of the war in Ukraine. Gas is often used for heating bitumen in storage. Stocks are set to stay at minimal levels in the colder months.
Question marks will also hang over the future viability of some European refineries, after a raft of closures in recent years. Record high margins for road fuels offered some respite this year, supporting global refinery throughputs. But as that effect cools, more capacity closures could be on the cards. Bitumen producing refineries, which tend to be older and simpler, would likely be at the front of the queue for closure or conversion to storage or biofuels facilities.
On the demand side, the economic outlook in Europe is looking parlous for the year ahead, with high inflation and public finances still reeling from the Covid-19 pandemic and related costs. In the past year bitumen consumption slumped in many countries, including a 17pc drop in the UK, a 20pc fall in Romania and a 24pc decline in Italy. Another slow year is expected in many cash-strapped European countries.
The outlook for bitumen prices in Europe is mixed. Price differentials to high-sulphur fuel oil (HSFO) — the peg most widely used for bitumen trade in Europe — should remain under pressure in the Mediterranean, where fob discounts are likely for parts of 2023, a far cry from the hefty premiums seen in pre-pandemic years, especially during the key second and third quarter peak construction activity periods. Bitumen supply in the Mediterranean will be more plentiful than in northwest Europe this year. And Mediterranean suppliers with large enough ships will continue to seek arbitrage routes, including to the Americas and occasionally to Asia-Pacific.
The price outlook in northern Europe is more robust, with the prospect of healthy premiums to HSFO as Russian Baltic bitumen cargo supply to the region — having surged to 400,000t in 2021 before dropping to around half that figure in 2022 on the back of self-sanctioning — comes off the market and northern European refineries produce less bitumen on the back of a lighter crude slates as they wean themselves off Russian Urals.
