The profitability of Europe’s oil refineries has slumped, raising the prospect of output cuts as input costs surge. A rise in physical crude prices and record supertanker hiring costs have increased expenses, while product prices like gasoline and naphtha have not kept pace. Refinery margins in north-west Europe tumbled from $54 a barrel in early September to as low as minus $11 a barrel on October 5, now at $3 a barrel per LSEG data.
The International Energy Agency cited 'crippling crude acquisition and freight costs' for crushing European and Asian margins. The decline in 'crack spreads' coincides with tightening global diesel markets, despite a US-Russia diesel deal expected to have little impact. Analysts warn further margin deterioration could prompt economic run cuts at marginal refineries in Asia and Europe, increasing market tightness before year-end.
Refineries face limited flexibility in product output from a barrel of crude, even for profitable products like diesel and jet fuel. Crack spreads for naphtha and high-sulphur fuel oil have sunk deeper into negative territory, and gasoline spreads turned negative last month. Benedict George of Argus noted margins are 'very, very thin' and refineries are unsure of next steps, though a negative crack spread lasting three weeks or more may trigger strategic changes.
Concerns over Gulf oil supplies, including a pause in Saudi Arabia’s East-West pipeline, led to premium payments on future deliveries. However, benchmark crude prices and shipping costs have surged, with Dated Brent up over 13% in the past month. US refiners, using domestic crude, avoid shipping cost surges and are set for a more than fourfold profit increase.
Global refinery operations are projected to hit a seasonal low of 81.3 million barrels a day this month.
Source: Financial Times Companies · Summarized by HeadlinesBriefing