Are refining margins back?

Refining margins rarely exceeded US$5/bbl in Europe and US$8/bbl in Asia between 2009 and 2014, whilst the US was the only safe haven and averaged US$15/bbl. This year however, the game has changed as global oversupply triggered a crude price collapse, resulting in healthier refining margins and year to date averages in Europe are US$9, US$12 in Asia and US$20 in the USA.

This story, Douglas Westwood has said, is not new and many would expect that in markets geared heavily towards light/sweet oil the premium for processing lower quality crude, the complexity advantage, should tighten in a low oil price environment. Yet, this is not happening. Since the start of this year, a barrel of Russia’s Urals trades at a discount to Brent of US$1.5, moving in a –US$1/12 range. Nigerian Bonny Light traded at a 10 year low premium to Brent last week of US$0.23 versus US$2 early last year.

The reasons

Douglass Westwood has said that many factors are at work here. Firstly, the downstream supply chain is somewhat rigid, as refineries are designed and located for ease of supply and so process specific crude grades, making switching uneconomical. But the primary driver of reduced premiums is now the level of oversupply of crude. Spectacular growth in US light oil production has squeezed output of light/sweet West African, and heavy/sour South American crude grades. Meanwhile, the Middle East maintains production and becomes the reference for Asian buyers, leaving European refineries with a steady Russian output supplied through pipelines.

Recent history shows the virtues of composure, Douglas Westwood has commented. Following the US fracking revolution, Gulf Coast refineries freshly upgraded to process anticipated heavy/sour foreign crude have not seen returns on investments, while those who passed on costly upgrades are now well positioned to process booming domestic light/sweet production. However, refineries should not be relying on sustained high margins. As the market works through an enduring supply glut, and grapples with the prospect of renewed Iranian output, the complexity advantage is likely to prove as volatile as crude prices.

Edited from press release by Claira Lloyd

Read the article online at: https://www.hydrocarbonengineering.com/refining/30062015/refining-margins-back/