Europe makes hay while the sun shines

This month’s IEA report noted that January-March was the first quarter of year-on-year demand growth in Europe as a whole for one and a half years, coming in at 2.6pc.

January numbers showed bigger economies — including Germany, Spain, Turkey, Belgium and the Netherlands — increasing consumption. In February, France joined in, although Germany fell back a trifle, the IEA says. Argus Fundamentals has first-quarter European demand growth at almost 3pc and expects demand in the region to continue growing in the second quarter, although at a slower rate.

Early indications from refiners are that central and eastern Europe is benefiting from an upturn, as well as the bigger economies. Austria-based OMV’s trading statement today said the first-quarter utilisation rate was 92pc, a three percentage point increase on the year. Its refining margin reached $7.45/bl in January-March, compared with just $1.63/bl a year earlier.

Poland’s biggest refiner PKN Orlen’s quarterly profits rose seven-fold on the year on better margins, higher volumes and, crucially, stronger demand. It saw rising diesel demand in Poland — its major market — Lithuania, and Germany. Demand for gasoline marginally grew in Poland and Germany, it said. PKN Orlen refined nearly 542,000 b/d in the first quarter, a 7pc increase on the year. Tentative plans to shut in the 263,000 b/d Mazeikiai refinery in Lithuania remain on hold as PKN makes hay while the sun shines.

And Czech refiner Unipetrol — a subsidiary of PKN — is tentatively optimistic too. It expects an increase in domestic demand for fuel and petrochemicals in 2015. Its capacity utilisation rate in the first quarter was a comparatively modest 84pc although this did represent an increase on a year earlier and it noted that its Kralupy refinery had been shut down for maintenance for part of the period. Even excluding a newly-acquired chunk of capacity, its first-quarter sales were better than for any first quarter since at least 2010.

Bullishness certainly needs to be heavily qualified. For instance, in Poland, a recent government crackdown on unregistered “grey” diesel that was estimated to account for as much as 13pc of consumption a couple of years ago will benefit local refiners but does not represent a rise in demand, simply more reliable counting. Also, it is unclear to what extent demand growth has been driven by a fall in pump prices, which will go into reverse if crude prices pick up, and how much from stronger economic growth, which might be more resilient.

PKN’s chief financial officer, talking about Mazeikiai, injected a reality check when he said, “In the long run, the high margins are not sustainable.” However you look at it, there’s still too much refining capacity in Europe.

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