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European refining sector improvements

Hydrocarbon Engineering,

According to Business Monitor International (BMI), lower oil prices are driving improved margins in Europe after years of poor returns that have driven significant consolidations of the industry. However, this is expected to be only a temporary respite to the challenges faced by the downstream industry, with weak economic growth projected for Europe, and US refiners currently in the midst of a substantial period of maintenance.

Since late June the rout of oil have taken approximately 20% out of the price, however Brent has fallen more than WTI over the same period. This has narrowed the spread between the two benchmarks to approximately US$ 3/bbl in recent weeks, as opposed to the plus US$ 10/bbl US refiners have benefits from over much of the last four years. With the oversupply in the Brent market unlikely to shift over the coming months, unless OPEC decides to cut production quotas in its November meeting, BMI expects the spread between WTI and Brent will remain tighter than it has over the last four years.

This dynamic can be seen in the relative crack spreads. In northwest Europe a clear uptrend has been evident since late 2013, while in the US crack spread margins have fallen away. Europe’s largest refiner, French major Total, reported in Mid-October that its refining margins were at a near two year high and has improved for the second consecutive quarter.

While the fall in oil prices has been a factor in improving margins, so has the significant consolidation of the downstream industry in Europe over the last few years, BMI accentuates. Divestments in refineries have seen a purge of the less efficient facilities, while investment has also been made to optimize many of those remaining. Europe’s refining sector is now more efficient than five years ago, though it is also a few million bpd smaller.

This could give European refiners a small advantage over their US counterparts, if the Brent-WTI spread remains narrow. However, while BMI expects the relative competitiveness to remain closer than it has been over recent years, the access to domestic feedstock and a better macro economic outlook gives US refiners the edge.

On reason why European refiners have seen improved operational performance so far over H2 2014 is the considerable amount of refining capacity that is offline in the US. Since early September over 1 million bpd of refining capacity has come offline as the busiest maintenance season of 2014 began.

This has seen a reduction in US exports of refined fuels to Europe over recent weeks, particularly diesel, which has given European refiners the opportunity to make up the difference in the short term.

However, over the longer term, BMI sees greater challenges ahead for European refiners. Efficiency goals proposed by the European Commission are targeting a 30% reduction in energy efficiency by 2030 – based on 2007 projections. This would add further downward pressure to already falling demand for transport fuels in Europe.

According to BMI, the improvement in efficiency in the European refining sector is already starting to show the benefits as refining margins improve. However, while this is a positive development, the streamlining of operations is expected to continue as efficiencies – particularly in the transport sector – and weak economic growth, continue to weigh on demand.

Adapted from a report by Emma McAleavey.

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