What’s ahead for European refiners?

Energodigest | 29 September 2022
While oil product prices are generally on the decline, reflecting the downward momentum for crude, they are still much higher than last September, with CIF NWE cargo prices for middle distillates and gasoline rising 65% and 14% y-o-y, respectively (see Fig. 1). Earlier this month, diesel in Europe traded at a record premium over gasoline[1] (around $300 per tonne). The widening spread was underpinned by the growing price of natural gas, which is used to produce hydrogen needed for converting heavy crude oil streams into diesel fuel.
Naphtha has lost 7% in price from a year earlier, impacted by the ongoing malaise in the petrochemicals sector. As was earlier reported by the IEA, between January and May 2022 demand for naphtha plummeted by 1.1 million barrels per day (14.2% of total demand and more than double the typical seasonal fall).[2]

After peaking in June, spreads for gasoline and middle distillates are now contracting. So is the naphtha crack, which reached its widest point in April. For most other products, however, spreads remain wider than seasonally adjusted normal levels. Those refiners who continue to buy cheap Russian crude, which has traded at a 20% discount this month, are now sitting pretty as they enjoy a clear advantage over peers. Indeed, the diesel crack spread to Urals has been around $525 per tonne in September, compared with only $380 to Brent. When it comes to naphtha produced from Brent crude, things look even worse, with the gross margin remaining in negative territory for the fourth straight month at an average of minus $35 per tonne (see Fig. 2).
From 5 December 2022, many European refiners will no longer be able to take advantage of Russian feedstock, while within the following two months, once the restrictions on oil product imports from Russia take effect, the ripples will be felt keenly by consumers who are already facing enormous cost pressures. The EU is now looking elsewhere for oil products. Germany, for example, has inked a deal with the UAE to supply up to 250,000 tonnes of diesel per month throughout 2023,[3] while France’s TotalEnergies signed a strategic alliance agreement with Abu Dhabi National Oil Company earlier this year.[4] European countries are also pinning hopes on producing their own diesel grade fuels from biomass feedstock. Let’s wait and see what will come out of this.
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