European refinery margins have found support from recent weak crude values, sources said.
Refining margins in NWE have improved markedly over recent weeks on the back of a weakening Dated Brent price. The cracking margin for Ekofisk in NWE increased from minus $2.41/b on January 22 to plus $6.685/b on July 14, and is currently hovering just below that level at plus $5.14/b.
However, the strength in margins has been attributed to low crude oil prices, rather than a strong performance by the product market, leading some traders to question the sustainability of the trend.
“Margins are good, but they are led by weak Dated Brent, and not by strength in products,” a crude oil trader told Platts. “Refiners should be looking to buy and fill their tanks, but they are already mostly long in terms of crude in tank.”
A second trader described margins further out as “still pretty awful.” Other traders also highlighted the trend in forward margins. “Margins are good now, and the question is whether refiners will ramp up runs,” another crude trader said. “The forward margins are not looking good at all.”
Diesel cracks have continued to gain ground over August, on stronger regional demand, both from seasonal consumption and opportunities of economising structural paper opportunities on the forward curve through storage plays ahead of the fourth quarter.
Spot ULSD FOB Rotterdam barge crack differentials to Dated Brent were $16.68/barrel Thursday, $1.54/bl above the 2014 average so far, but down $1.46/bl compared with the same period last year, according to Platts data.
Meanwhile, high sulfur vacuum gasoil, a hydrocracker feedstock used to make diesel, has suffered from a lack of demand owing to better crude margins and refinery maintenance on secondary units, sources said.
FOB NWE HSVGO cargo cracks were assessed at a $20.02/b discount to comparative diesel cargo cracks Thursday, the widest discount since December 7, 2012, Platts data shows.
“FCC and hydrocracker margins are excellent. The problem is though, you still have to find a buyer for your VGO. There are still so many units down for one reason or another and the supply is so relentless that VGO values have collapsed,” a source said Friday. Stronger Jet cracks also continue to give refiners an incentive to maximise the higher quality grade product ahead of distillates where possible, lending some modest support to diesel.
“Jet/diesel is also moving in the direction to lose [jet] yield for the balance month, and certainly for September onwards I would expect more yield loss to diesel,” a jet trader said.
Comparing prompt physical assessments, there remained an immediate incentive to maximize jet output. Jet FOB Rotterdam barges were assessed $0.58/b over ultra low sulfur diesel Thursday, on a density adjusted basis. For prompt CIF NWE Cargoes, diesel was $0.19/b over jet.
However, with September diesel swaps overtaking jet swaps on a density-adjusted basis last week, the return of higher diesel runs next month may present a ceiling for premiums in Europe. The outlook over the final quarter of this year show cracks down for diesel on a year-on-year basis. In the forward crack swaps market, ULSD FOB Rotterdam barge crack swaps for Q4 14 were $14.79/bl Thursday, $5.20/bl below year-ago levels.