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Margin call

European refining enjoyed a healthy end to 2016. Opec's production deal should add further support

Falling global refinery throughput since the summer has helped to draw down oil-product stocks and support margins. In October, global refinery runs averaged 77.2m barrels a day, according to the International Energy Agency (IEA), down from almost 81m b/d in July.

As runs fell, so did inventories. This boosted refinery profitability, especially in Europe. Between July and October Brent cracking margins surged by almost 50%, reaching year-to-date highs of $5.72 a barrel, according to the IEA. The agency expects global refinery runs to have fallen by a seasonal 1m b/d in Q4 2016, down to 78.9m b/d. While this is 150,000 b/d higher than in Q4 2015, growth over the whole year-estimated at 270,000 b/d-is the weakest in more than a decade.

As well as lower runs, refinery maintenance and reduced arbitrage flows from the US have helped to draw down product inventory. By mid-November, distillate stocks in Amsterdam, Rotterdam and Antwerp had fallen 16% below year-earlier levels, to 22m barrels, according to BNP Paribas.

Total OECD product stocks fell by 12.8m barrels between July and September, according to the IEA, to 1.566bn barrels. OECD Europe was responsible for the draw, as its total product inventories fell by almost 19m barrels, to 573.5m barrels. In OECD Asia and the Americas, swelling middle-distillates stocks helped to pushed their inventories higher.

In January and February next year, the IEA expects refinery runs to average 80.4m b/d and 80m b/d respectively, a 0.67m-b/d rise from a year earlier and around 1.5m b/d above Q4 2016 levels.

For Europe's refiners, margins in the first quarter will also depend on maintenance and outage levels in Latin America, which could limit US Gulf spot diesel exports to Europe over the winter. Brent cracking margins will dip seasonally to around $1/b in Q1 2017, down from $2.50/b in Q4 2016, according to Energy Aspects, a consultancy. By Q2 they are expected to at least double. LLS cracking margins in the US Gulf will be the strongest regionally, averaging around $3/b.

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