Refiners hampered by Rhine and China challenges: IEA

European refinery runs were hampered by extremely low Rhine water levels in August, while global throughputs have been significantly capped by a lack of Chinese product demand, according to the International Energy Agency's (IEA) latest monthly Oil Market Report.

Seasonal gains nevertheless made August a post-Covid peak for global refinery runs, according to the agency. Runs are forecast to fall in the coming months and not to regain those heights until the second half of 2023.

The IEA estimates that European refinery runs fell in August partly because of disruption caused by exceptionally low Rhine water levels. Argus has reported that Germany's two largest refineries, the Shell Rhineland complex and the Miro joint venture, each totalling around 300,000 b/d of capacity or more and situated by the Rhine, were respectively forced to cut throughputs and suspend some product loadings in August. The latest Euroilstock data suggests a 0.6pc slowdown in EU-15 and Norway refinery runs in August.

European refinery runs rose in July, in a move the IEA attributes to three countries in particular — the restart of France's long-shuttered 222,000 b/d Donges refinery and the completion of maintenance in Belgium and Norway.

The weakness of Chinese demand has been weighing on global refinery runs, with China's refiners processing 520,000 b/d less crude month on month in July. The IEA has cut its estimate of global refinery runs by 420,000 b/d for the third quarter, as a result. Overall, this brings refinery output roughly into line with product demand. Global product inventories rose slightly over the summer, but those volumes are likely to be drawn down again as refinery maintenance begins in September.

The IEA points out that in the coming months three major new refineries are on track to start up and will be able to process 1.6mn b/d of crude between them. These refineries may play a key role in how the world handles the EU's ban on Russian diesel next year.

Assuming these refineries are able to operate near full capacity by spring 2023, they could produce a diesel and gasoil volume equivalent to nearly half of Russia's current exports. At a 25pc average diesel and gasoil yield, they would produce 1.5mn t/month of those products. Russia typically exports around 3.5mn t/month of diesel and gasoil.

Even in this case, the world will still need Russia to find new buyers for around 2mn t/month of these products, and relying on these new refineries could simply shift the supply squeeze from diesel into crude markets.

Kuwait's 615,000 b/d Al-Zour refinery is likely to free up more Mideast Gulf supply for shipment to Europe. Mexico's 340,000 b/d Olmeca refinery could increase supplies of diesel from the US Gulf coast, which mainly supplies Latin America.

Nigeria's 650,000 b/d Dangote refinery could, in theory, fully cover west Africa's gasoil deficit. Dangote would only need to produce a 32pc gasoil yield to cover west Africa's usual 800,000 t/month gasoil imports, as per Vortexa data. For context, Italy's refineries yield 43pc gasoil. India is currently the leading supplier of gasoil to west Africa, so may have more diesel to export to Europe as a result.

The IEA noted mismatched movements in margins among different types of refinery in Europe — they converged. Simple refineries' margins rose sharply from a low base, while crackers of light sweet crudes earned slightly more month on month and crackers of medium sour grades — which had been the most profitable in Europe — suffered from the spike in gas costs. Hydrogen from gas is needed to convert heavier feedstocks into diesel and extract sulphur from them.

"In Europe, the refinery crude slate is now increasingly dominated by light sweet, diesel-oriented grades, requiring minimal natural gas inputs for processing," the agency said.

By Benedict George