Consultants question if 2015’s high global refining margins are sustainable
6/29/2015 12:00:00 AM
Between 2009 and 2014, refining margins rarely exceeded $5/bbl in Europe and $8/bbl in Asia, whilst the US was the only safe-haven, averaging $15/bbl, according to the DW Monday report from consultancy Douglas-Westwood.
In 2015, however, the game changed as the global oversupply triggered a crude price collapse, resulting in healthier refining margins year-to-date averages in Europe are $9, $12 in Asia and $20 in the US.
This plot is not new and many would expect that in markets geared heavily towards light/sweet oil the premium for processing lower quality crude the complexity advantage should tighten in a low oil price environment, the report said.
However, this is not happening. Since early 2015, a barrel of Russias Urals trades at a discount to Brent of $1.5/bbl, oscillating in a -$1/-$2 range. Nigerias Bonny Light, arguably one of the highest quality crudes, traded last week at a 10-year low premium to Brent of $0.23, vs. +$2 in early 2014.
Many factors are at work here. Firstly, the downstream supply chain is rather rigid, as refineries are designed and located for ease of supply and so process specific crude grades, making switching uneconomical.
But, the primary driver of reduced premiums is now the level of oversupply of crude, according to the consultants. Spectacular growth in US light oil production has squeezed output of light/sweet West African, and heavy/sour South American crude grades.
Meanwhile, the Middle East maintains production and becomes the reference for Asian buyers, leaving European refineries with a steady Russian output supplied through pipelines.
Recent history teaches the virtues of composure, the consultants said. Following the US fracking revolution, Gulf Coast refineries freshly upgraded to process anticipated heavy/sour foreign crude have not seen returns on their investments, while those who passed on costly upgrades are now well positioned to process booming domestic light/sweet production.
However, refiners shouldnt be banking on sustained high margins. As the market works through an enduring supply glut and grapples with the prospect of renewed Iranian output, the complexity advantage is likely to prove as volatile as crude prices.
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