Refiners' margin call
They made hay while the sun shone, but rain is on the way
THE PROFITS to be had from refining crude oil into fuel are weakening, and US demand for gasoline probably won’t come to the rescue, because stocks are bulging.
In Europe, refining margins are under pressure, as Brent cracks are expected to fall to $2.50 a barrel in the third quarter, according to data from Energy Aspects. That’s down from around $4/b in Q2 and $5.80/b at the same time last year.
Margins in the Mediterranean will fall into negative territory – meaning refiners would pump at a loss – by the fourth quarter. That’s down from average Urals hydrocracking margins of around $2.75/b in Q2 and $5.54/b in Q4 2015. European hydroskimming margins have been in negative territory since 2014 and are expected to remain loss-making this year.
Midwest WTI cracking margins will also tumble to around $1.50/b in Q4, down from an average of around $4.25/b over both the second and third quarters.
Unlike last year, US gasoline demand isn’t going to bail out European refiners. Not that Americans don’t need the gasoline; they do. Demand remains high, and on track to reach 10.16m b/d in July, according to estimates. This would represent growth of around 6% compared with a year earlier and may set a new record.
But US inventories are bulging. Gasoline stocks surged to almost 259m barrels in the week ending 12 February, Energy Information Administration data show. That’s 16m barrels higher than last year. US gasoline stocks have since begun to draw, falling to 240.6m barrels for the week ending 6 May. This is still almost 13m barrels higher than a year earlier.
A glut of distillate fuels in northwest Europe has also been weighing on profits. Diesel and gasoil stocks in the Amsterdam, Rotterdam and Antwerp (ARA) trading hub have now begun to draw down from record highs at the end of last year, but remain around 20% higher than a year ago. For the week ending 6 May, ARA distillate stocks stood at over 24m barrels, according to BNP Paribas. That’s almost 4m barrels higher than a year earlier.
Energy Aspects expects ultra-low-sulphur-diesel cracking margins to average $7/b in Q3, down from $16.63/b in Q1 2015 because of the product glut.
Gulf Coast diesel cracks will average $9.46/b this year, down from $18.18/b in 2015. European runs will fall by around 100,000 b/d between the third and fourth quarters, to 6.6m b/d, according to Energy Aspects. US runs are expected to fall by 0.5m b/d between Q2 and Q4, ending the year at around 16.10m b/d. Saudi Arabia’s run will also fall by around 200,000 b/d between Q2 and Q4, down to 2.3m b/d. Total global refining runs are expected to peak in Q3 at around 79.80m b/d, before falling by around 1m b/d in Q4.