Dr Discount Crude cannot cure European refining’s ills

When Europe’s embattled refining sector was jolted back to life last year by low input costs and wide crack spreads, few thought the remission would last. The relief provided by lower crude prices would inevitably fade, with a return of the pain caused by what the IEA described in its May Oil Market Report as “the strong gravitational forces of structural demand decline”.

But not just yet. The battle for market share being played out among the world’s largest crude producers means that with some smart manoeuvring Europe’s refinery fleet is enjoying the evening of its day.

Deals are being cut on discounted crude, often on a trial basis, with no commitment necessary – good business for a sector that lives and dies on margins.

In this brave new world, southern Spain’s Mediterranean ports of Cartagena and Tarragona have become crude bazaars, attracting some of the world’s largest sellers. Here, supplies from Kazakhstan, Russia and Norway are displacing those from west Africa, Algeria and Azerbaijan as Repsol exploits competition.

Returning Iranian crude has found a warm welcome at the mouth of the Med, as the Mideast Gulf Opec heavyweights tussle for market share in Europe. And Russia, seeing some unexpected encroachment on its traditional territory, has had to join in this rush for custom — hence crude from Kola bay, a remote Russian production site north of Murmansk , washing up at Spain’s northern port of Bilbao.

Europe’s crude buyers will gorge at this cut-price buffet for as long as they can. But these are empty calories for a sector in need of a detailed nutritional plan.

European refiners operate in a market where, as UBS succinctly puts it, demand is in structural decline, notwithstanding last year’s price-driven fillip. The UK’s vote to leave the EU will be felt through the fear of economic contagion within Europe, Barclays says. The bank now forecasts a contraction in European oil demand this year.

UBS says European refiners are forced to find export markets. The biggest and best is the US, where gasoline demand growth is the key support of European refining margin strength. But this growth may have peaked, according to the EIA.

BP’s refining marker margin — an imperfect, generic data point, but one of the best there is nonetheless — shows margins under pressure in northwest Europe and in the Med.

Total’s own generic marker, due in a couple of weeks, should track a similar trend downwards from the giddy levels of a year ago.

So, despite the opportunities arising from the crude market free-for-all, little has changed since the start of the year — further capacity closures will be needed.

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