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Lower crude prices offer short term relief for refiners

Hydrocarbon Engineering,

According to Business Monitor International (BMI) the fall in crude oil prices had helped to lift results of integrated oil companies, as lower refining feedstock costs helped increase profits in their downstream business.

Third quarter gains

The price of Brent fell by 15.7% over Q3 2014, while West Texas Intermediate (WTI) fell by 13.5% over the same period. With the exception of gasoline, which saw a 14.8% decline in prices in Q3 2014, the decrease in prices of other oil products have been less pronounced.

Jet fuel managed to buck the downwards trend to see considerable gains until September. The relative stickiness of product prices relative to crude prices helped refiners ink gains over the quarter.

Gains to narrow in Q4

Going into Q4, BMI sees a convergence in the rate of change in crude oil prices vis-à-vis oil product prices. Refiners will likely make smaller refining gains from falling crude oil prices in Q4 2014 than in Q3 2014.

Product slate matters

Gasoline remains the under-performer, with prices falling at a faster rate than Brent compared to other oil products. Prices are unlikely to recover relative to Brent, due to the following:

  • Winter has traditionally seen lower demand for gasoline.
  • Fuel efficiency gains continue to hit gasoline demand in developed countries.
  • Political pressure on gasoline prices. As the oil product most visible to the consumer market, retailers have started seeing an increase in calls for a cut in pump prices to reflect the fall in crude prices.
  • Subsidy cuts. Fuel subsidy cuts – which will most affect gasoline – in several emerging markets including Indonesia could see a near term fall in demand.

Refiners heavy on gasoline production will thus benefit less from the fall in oil prices than refiners better equipped to adjust their slate to produce other oil products. Gasoil prices, in particular, could be more resilient to steeper price decreases thanks to support from winter heating demand. On the lower end of the barrel, better price support in New York than in Rotterdam and Singapore for bunker fuel means that refiners targeting the New York bunker market will see higher margins than those targeting the other two.

Long term gains to close

Despite the short term relief provided by a lower crude oil price environment, in the longer term BMI expects oil prices to better reflect the downward trend in crude prices. Thus, the same headwinds that refiners had faced prior to the crude price drop will return to put pressure on refiners.

  • Slow demand growth: Slower economic growth in key markets such as China and greater fuel efficiency and more stringent environmental standards in developed markets will see slower growth in oil consumption.
  • Well supplied global downstream market: Refining expansions in emerging markets, particularly in Asia and the Middle East, and the US’ continued advantage in procuring cheaper crude feedstock, will continue to put pressure on less efficient plants in developed markets in Europe and Asia. Without higher margin support from growing demand and/or falling input costs, these plants will either have to consolidate or move further up the downstream value chain to stay competitive.

Adapted from a report by Emma McAleavey.

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