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Citi: 15% of European refining capacity is unprofitable

Hydrocarbon Engineering,

European refining margins have fallen 60% since last year, and changing market conditions will put even more pressure on them in the next few years. The industry has opted to reduce throughput instead of closing facilities to account for weak profitability, but this is a temporary fix that won’t last for long, argues Citi analyst, Mukhtar Garadighi.

The major issues are as follows:

  • Refining capacity has boomed and Europe hasn’t been able to compete on price. Russian distillate exports to Europe have climbed 60% and are set to grow over the next four years. Saudi Arabia will add 1.2 million bpd in refining capacity over the same time frame, making it a net exporter of both diesel and gasoline.
  • One of Europe’s most reliable markets is increasing its own supply and displacing European imports. Shale oil in the US is driving growth in domestic output. While fracking is politically controversial, it is at the moment giving US refineries a competitive edge.
  • European refineries could improve their position by closing 15% of capacity, however political and labour issues make this course of action complicated. Garadaghi highlighted that there is no sign that oil industry leaders are prepared to make the necessary changes to protect their long term interests.

‘We see the Greek and Italian markets as the hardest hit in the coming years through a function of weak domestic demand and the rise in Middle East imports’ said Garadaghi. ‘We highlight Eni SpA, ERG S.p.A. and MOTOR OIL HELLAS among the companies most exposed to increased competition in their key export markets’.

Edited from various sources by Emma McAleavey.

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