Commodity Analysis

Diesel glut has Europe’s refiners in a spot

Rachel Graham/Jack Wittels/ Sheela Tobben | Updated on October 04, 2020 Published on October 04, 2020

Region’s refineries will operate about 25% below capacity this month, say analysts

The coronavirus is destroying the profitability of Europe’s oil refiners and the industry is hunkering down for a tough winter. Owners of plants in Finland, France and the Netherlands made announcements in recent weeks that point to the likely closure of facilities in those countries. While that would take out some surplus refining capacity, there’s a more pressing issue: the region’s refineries will operate about 25 per cent below capacity this month, according to IHS Markit. With virus cases surging and diesel trading near its weakest in at least nine years, few are optimistic for a meaningful recovery

Recovery slows

Refineries, responding to still-collapsed jet fuel demand, are making more of the road fuel instead. Another challenge is that gasoline markets are holding up as people avoid public transport by driving their cars to work.

That puts pressure on the plants to continue processing crude even if it means churning out more diesel at a time when demand remains lacklustre.

Diesel now costs about $4 a barrel more than crude in Europe, after falling recently to the lowest in at least nine years.

That’s particularly difficult for Europe’s refiners since the fuel represents almost half a typical plant’s output.

Gasoline traded at just over $4 a barrel more than crude in Europe last Wednesday.

That’s a big improvement on recent months, but still a very low level by historic standards.

Demand recovery will be hampered by restrictions on movement and very subdued jet demand.

While refiners can re-jig what they make depending on seasonal changes in demand, European producers would normally expect demand for heating oil, a similar product to diesel, to support margins in winter. The current weakness also coincides with maintenance season in the industry, when the idling of capacity should also offer some support.

The International Energy Agency expects refining runs in OECD Europe to dip in September and October, then bounce back to August levels in November. Several traders and an oil trading analyst said such a recovery might be optimistic, given the industry uncertainty that rising numbers of virus cases has caused.

In the US, the oil industry is bracing for more refinery run cuts, at least in the near term, just to trim bloating diesel stockpiles. This is even as nationwide utilisation is already at its lowest in three decades seasonally.

Refiners on the Gulf Coast, America’s refining belt, may have to bear the brunt and cut operations to roughly 60 per cent and keep them there for a month, he added.

Still, some of those cuts could take the shape of a slower return to normal levels before storms swept through the area recently, according to Chris Barber, principal at energy research and consulting firm ESAI Energy.

Fuel oil

Even if demand for key oil products does continue to recover, the return of OPEC+ supply could add a new headwind for some refiners, according to Jonathan Lamb, an analyst at Wood & Company, an investment bank.

Cuts in output by the producer group led to a tighter market for high-sulfur fuel oil, a residue from crude oil refining that makes up a big proportion of what more basic refiners churn out.

Bloomberg

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Published on October 04, 2020
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