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High margins won't last, say cautious EU refiners
September 26, 2012 / 9:30 AM / 5 years ago

High margins won't last, say cautious EU refiners

LONDON (Reuters) - The high refining margins enjoyed by European refiners in the second and third quarters of this year won’t last, refiners and analysts said at an industry conference in Brussels, with many unwilling or unable to ramp up output to the maximum.

“Margins are high at the moment, but runs are low,” Alan Gelder, head of oils research at Wood Mackenzie, said on the sidelines of the Platts European Refining Markets Conference on Tuesday. “There’s a lack of commitment to buying crude oil feedstock.”

Vienna-based research firm JBC Energy has calculated utilisation rates for the EU 15 plus Norway at around 85 percent for August, relatively strong for 2012 but still below U.S. utilisation rates of 93 percent.

Gelder suggested European refineries were reluctant to ramp up production further because they don’t believe the high margins will last. “Industry discipline has kicked in and they’ve become very cautious. At the moment it’s a case of just deliver what you know you can sell.”

Cracks are high due to supply disruptions following major refinery fires in the United States and Venezuela and ongoing seasonal maintenance in Europe, but refiners said underlying factors such as weak demand would reassert themselves.

“We need to be prepared for unpredictable margins and improve our competitiveness regardless,” said Nathalie Brunelle, senior vice president, strategy, development and research in Total’s (TOTF.PA) refining and chemicals division.

“The bearish margin argument has been delayed, not cancelled,” agreed Seth Kleinman, global head of energy strategy at Citi.

Refined product margins have been highly volatile this year with gasoline margins moving from negative territory to over $20 a barrel. Gasoil has been more stable, but has shown unseasonal strength through the summer as diesel markets tightened considerably, and even fuel oil cracks have improved.

Facts Global Energy estimates that overall refining margins hit a four-year high of $8 a barrel in early September, helping trading houses which bought refineries at rock-bottom prices earlier this year to offset their outlay.


Many European refiners have been unable to take full advantage of these high margins due to scheduled maintenance, long lead times for ordering crude and a pronounced scepticism that the good times can last.

Robert Mwasaru, director of group planning and optimisation at MOL MOLB.BU, said the period of stronger margins had come as a surprise to most in the industry, with poor forecasting from analysts even as to the direction of Brent crude prices.

    “You have to be very fast to react to market changes, but there is a timegap between feedstock ordering and physical delivery,” he said. “You have to ask if you are confident your refining margin will still be there in two months’ time to make the marginal crudes profitable.”

    Switching from maximising diesel to maximising gasoline and vice versa might also take weeks, while sourcing customers is critical. “When operating flat out it is always a challenge to place the gasoline,” Mwasaru said.

    He also highlighted an inability to ramp up production if units were offline for repairs. “On an operational level, I have never seen a refinery without any problems - something is always leaking,” Mwasaru said.

    Refiners that offloaded their weakest assets and invested in upgrades put themselves in the best position to benefit from the unexpectedly favourable market environment over the summer.

    Peter Mather, group regional vice president Europe at BP (BP.L), said utilisation rates for BP refineries were at the top end of the industry, with an overall global utilisation rate of some 94.5 percent for the second quarter of 2012.

    He attributed this to BP’s disposal of around 10 refineries globally over the last 10 years and investment for a feedstock advantage in Europe. “We have been high grading our portfolio and these are the results,” he said.

    Editing by James Jukwey

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