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Bulging product stocks pressurise refinery margins

Profits for processing crude into refined products have fallen far from last year’s highs. Europe in particular is feeling the pressure

REFINING margins across the globe are under pressure, buckling under the weight of bloated stocks.

Last year's slump in Brent prices was especially good for European product owners when margins rebounded after years of weakness. But now cracking margins across the globe are under pressure and European refineries in particular are struggling to make processing crude in products pay.

Margins are the weakest in the Mediterranean. Profits for processing Es-Sider into refined products slumped to just $1.36 a barrel ($/b) for the week ending 29 July, data published by investment bank BNP Paribas show. That's down from $3.59/b at the beginning of June and compares to an average of $3.08/b in Q1 and $5.36/b in Q4 last year.

Brent cracking margins in northwest Europe also slid to just $1.48/b for the week ending 29 July, down from $4.86/b for the week ending 24 June. Average cracking margins for Europe's benchmark crude were $3.20 in Q2, BNP Paribas data show.

European hydroskimming margins - for less complex refineries - have strengthened slightly in recent weeks but remain in negative territory.

In Singapore, Dubai crude cracking margins have also slipped from almost $5/b at the end of June to under $3.50/b for the week ending 29 July.

Profits across the Atlantic remain the strongest. Brent cracking margins in New York were $6.30/b for the week ending 29 July while profits for processing the US Gulf Coast LLS grade into refined products averaged $5.65/b.

Last year French major Total said European refining margins surged to a 12-year high, buoyed by depressed crude prices which had in turn boosted the continent's end user consumption.

Total's European refining margins indicator (ERMI) - which represents profits for a hypothetical complex refinery in Rotterdam soared to $54.8 per tonne in Q3 of 2015.

That was the highest level in records going back to 2003, and is in stark contrast to the first three months of 2014 when margins plunged to a four-year low.

Finnish refiner Neste's latest margins indicator for the beginning of August shows profits for processing crude into refined products have plunged by almost 70% over the past year.

Unlike last year, US gasoline demand won't bolster margins for European refiners - who export most of the road fuel produced there across the Atlantic. This is because stocks of the road fuel in both Europe and the US are bulging.

US inventories of the fuel reached 241.5m barrels for the week ending 22 July, the second highest level on record. Gasoline stocks in Europe - which exports the bulk to the US - stood at around 11.7m barrels at the end of July, according to BNP Paribas. That's almost a quarter above year-earlier levels.

Other products such as distillates have also been affected. At the end of July US distillate stocks were almost 8m barrels higher than a year earlier, at over 152m barrels.

European distillate stocks are around 13.2m barrels, according to data compiled by the bank. Although this is only slightly levels hit a year earlier, it's around 20% higher than the average over the past five years.

Refiners have already started to reduce crude throughput levels - the quantity of crude processed - as their profits have plummeted.

In May, European runs fell below 12m b/d for the first time since mid-2014, according to Energy Aspects - a consultancy.

Energy Aspects estimates northwest European cracking margins will average just $0.50/b in Q4.

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