Viewpoint: European refiners face tough 2021

European refining margins are likely to remain below breakeven levels until oil product demand not only recovers, but draws down bloated inventories.

Refiners in Europe will be hoping that margin recovery mirrors a recovery in fuel demand in 2021 — but the timeline continues to be pushed back.

Refining margins in the region will have little room to move upwards in the short term given the recent surge in Covid-19 cases, and associated measures taken in response — particularly lockdowns in Germany and the UK, two of Europe's largest road fuel consumers.

Margins were near or below typical complex refinery operating costs of $5-6/bl in the second half of 2020. Eurobob oxy grade gasoline averaged premiums of less than $1/bl to North Sea Dated crude in December, while French diesel cargoes averaged a $6.08/bl premium.

Meanwhile, markets will remain oversupplied well after new measures taken to curb the spread of Covid-19 are lifted. Middle distillate stockpiles in the EU-15 and Norway hit their highest in at least 30 years in November, according to Euroilstock. And this is problematic for European refiners, given diesel has historically been the most profitable cut of the refined products barrel by some margin, as Europe is structurally short on middle distillate supply.

Stocks have been buoyed by the fall in road fuel demand as a result of lockdowns, the contango in Ice gasoil futures, and the collapse of the airline industry. Lower jet fuel demand also led refiners to blend kerosene cuts into the diesel pool wherever possible given diesel's relatively favourable refining margins.

Inflated stocks were among the reasons cited by refiners — including Repsol and Gunvor when closing units temporarily, or permanently.

In total last year, around 1mn b/d of European capacity has already been announced to be closed, mothballed or converted. And Argus estimates that around 2mn b/d of crude capacity is temporarily offline because of the impact of the pandemic.

Further reductions in capacity could be needed, given the continued impact to demand of Covid-19, high stock levels, and the fact that Europe's refineries are still running at only 70pc of capacity, compared with levels of 80-85pc in 2019.

Any increase in refinery runs will need to be carefully managed, so as not to weaken margins any further. The IEA expects refinery throughputs to rise through January, before maintenance season starts, which could pressure margin further, although it is unclear how the unusual patterns of maintenance downtime in 2020 will affect seasonal maintenance activity in 2021. Utilisation might dip more deeply than usual in the spring, since some plants have had to postpone programmes from 2020 because of logistical challenges.

But, at the same time, more maintenance works than usual were reported in 2020, as refiners tried to limit their losses. This could mean that less plants will shut down for turnarounds in 2021, although it was difficult to distinguishing economic shutdowns from maintenance turnarounds in 2020.

Any recovery could of course be accelerated by permanent closures and capacity conversions across the continent. But the IEA said late last year that there would be 22mn b/d of excess capacity in the world in 2021, even after demand starts to recover. The European refining sector continues to face long-term structural overcapacity, which will only be intensified by the transition away from fossil fuel transport.

By Benedict George