Caught between soaring crude prices and collapsing diesel profits, European oil refiners are slashing operating rates by nearly one quarter ahead of the peak summer period.
Europe’s refining sector has battled for years with weakening demand and over-capacity which forced a string of plant shutdowns. Further closures may be looming.
This year alone, Hungary’s MOL Group shut down its Mantua refinery in northern Italy and the Milford Haven refinery in Wales stopped processing crude as its owner Murphy Oil seeks buyers for its British assets.
A convergence of rising crude oil prices to around $110 a barrel with extremely low diesel refining margins, usually the bulwark of profits, are wreaking fresh havoc.
“We have had weak refining margin environment particularly in the last couple of months and it is driven by weak diesel in particular,” Matti Lehmus, executive vice president for oil products at Finnish refiner Neste Oil, told Reuters.
Refining capacity in the Mediterranean region is set to drop by up to 25 percent this summer, whether by lowering operating rates or extending maintenance at plants, according to refiners and analysts. In coastal areas in northwest Europe, refineries are set to cut runs by around 15 percent.
European refining crude processing rates in June are set to reach 10.76 million barrels-per-day (bpd) or 76.3 percent of capacity, little unchanged from the peak maintenance months of March-May, according to data from Wood Mackenzie consultancy.
By comparison, operating rates in June 2013 reached 11.99 million bpd.
Runs are expected to rise to 11.12 million bpd or 78.8 percent of capacity in July but remain significantly lower than the previous year’s 12.14 million bpd or 85.7 percent of capacity. Similarly, runs in August will rise to 11.35 million bpd or 80.4 percent of capacity compared with 11.83 million bpd in August 2013, according to the data.
“When margins are like this you try to do as much of your shutdowns and turnarounds in a time like this,” said Marcel Van Poecke, managing director at Carlyle International Energy Partners, which specialises on European downstream investments.
“How long can you keep doing this? At a certain moment you’ve done all the maintenance you could do … the only thing left to do are run cuts.”
ALTERNATIVE CRUDE
Persistently high crude prices in the region have weighed heavily on refining margins.
Refineries in northwest Europe made $2 in profit for each barrel of Brent crude processed in May. In the Mediterranean, refineries processing Russian Urals made 12 cents a barrel on average in May, according to Reuters data,
That has led several refiners to seek alternative, cheaper crude sources.
Cargoes of Vasconia crude from Columbia, Maya from Mexico and Oriente from Ecuador have sailed in recent weeks to Europe, mostly to the Mediterranean, according to traders.
The flow of Latin American crude to Europe has steadily risen over the last year as booming domestic output has cut demand for imports in the United States.
Repsol will this month test the first batches of Western Canada Select (WCS) heavy blend at its Spanish refineries as it takes advantage of a provision that allows Canadian crude to be re-exported through U.S. ports.
“European refiners have to look to alternatives. Canadian supplies are slowly becoming more available to the market and the Latin American players have to reroute some of their exports away from the U.S.,” said David Wech, managing director at Vienna-based consultancy JBC Energy.
“Perhaps you can make a cheap buy at the beginning of such an inflow but in a few months the costs would increase,” he said.
THINGS CAN GET WORSE
In Europe diesel refining margins have hovered near a two-year low at around $10 a barrel in recent weeks.
Huge flows of diesel from highly competitive refineries in the U.S. Gulf Coast, Russia and Asia, that benefit from cheap crude feedstock, have kept supplies in Europe up and pushed prices down.
Imports from the U.S. are expected to reach above 2 million tonnes in May for the first time this year, according to shipping data and traders.
The flow is set to increase this summer as U.S. Gulf Coast refineries ramp up runs following the maintenance period.
“Diesel looks long and the situation will probably get worse before it gets better… I would anticipate U.S. arbitrage supplies to remain high until autumn maintenance,” said Robert Campbell, analyst at London-based Energy Aspects consultancy.
And with more refining capacity coming on line in Asia and the Middle East over the next year, diesel margins are set to remain under pressure.
Around 2 million bpd of additional refining capacity, the equivalent of 10 medium-sized plants or nearly 15 percent of Europe’s current capacity, will need to shut in the next four years to balance the market, analysts say.