European oil refiners are enjoying healthy profits in the fourth quarter compared with other regions due to unplanned maintenance in the Atlantic basin that has eroded inventories, offsetting typically weaker year-end demand.
Refining was a lifeline for energy companies when oil prices started falling sharply in the second-half of 2014. Cheap crude spurred record demand growth for motor fuels, which refineries worldwide scrambled to produce.
While global refining margins this year have tightened from 2015, Europe’s fourth-quarter margins have held strong, a boost to earnings for energy majors Total, BP and Royal Dutch Shell as the oil price languishes at less than half those of 2014 peaks.
Independent refiners such as Italy’s Saras and Finland’s Neste will also benefit.
“Margins were supported by turnarounds worldwide but the sizeable drop in Latin American refinery runs this year was probably the decisive factor,” Robert Campbell, head of oil products research at Energy Aspects, said.
The outages in Mexico, Brazil and Venezuela has led to a drop of up to 700,000 barrels per day (bpd) in refining capacity year-on-year, leading the region to significantly increase its imports from U.S. Gulf Coast refineries, Campbell said.
They also pulled in gasoline cargoes from Europe just when demand for the fuel across the Atlantic typically fades with winter weather. As a result, global stocks of gasoline and diesel tightened far more than expected in recent months.(http://tmsnrt.rs/2br1O3U)
BP’s benchmark refinery margin marker for northwest Europe, a proxy of refinery profitability, are on track to gain some 25 percent in the fourth quarter from the previous one even as global margins tighten, according to BP.
Last year, even amid surging profits, BP’s European margins indicator fell 35 percent from the third quarter to the fourth as demand for Europe’s exported gasoline cooled with the weather in the United States.
Traders and analysts said Europe’s refineries, though smaller and older, were benefiting from serving as a swing producer, cashing in on the spurts of demand. By contrast, margins in the U.S. Gulf Coast refining hub, with bigger and more efficient units, are down nearly one third on the quarter and the year.
Total, Europe’s biggest refiner, said its margins had risen to roughly $40 a tonne at the beginning of the quarter, from $25.50 a tonne in the third quarter, supported by stronger gasoline prices.
But profits could be more limited next year, with a cautious global economic outlook and a continued recovery in crude oil prices following OPEC’s agreement last week to cut production, will likely weigh on refining margins in 2017.
“Looking into 2017, I would expect refining margins to be down year-on-year, especially if OPEC and Russia cut,” Giacomo Romeo, oil and gas equity analyst at Macquarie Capital, said.
The production cuts would reduce the supply of heavy and medium crude grades, weakening refining margins, particularly for companies like Spain’s Repsol, for which heavy crude represents around half of the refinery diet, Romeo said.
Global oil demand in 2016 is expected to rise by 1.2 million barrels per day, compared with the previous year’s 1.8 million bpd rise, a five-year peak.