European refining margin:
the sky’s the limit

Energodigest | 30 June 2022
Europe is still struggling after it banned Russian oil imports, and the debate about Russia’s ‘black gold’ is now in full swing. While alternative supplies from Norway (Johan Sverdrup), Iraq (Basrah Medium), Egypt (Suez Blend) and other countries are becoming increasingly significant amid changes in global supply chains, Russia continues to be the region’s major supplier, with an average of 1.4 million b/d shipped to Europe by sea last week.[1] Note, however, that this is 23% less than in late February (see Fig. 1), with oil supplies destined for Europe (excluding those by pipeline) having shrunk from around 60% to 40% of Russia’s total oil exports.
European refiners who purchase Russian crude are benefiting from its low price, as it is sold at a substantial discount to Brent ($30/bbl vs. an average of $1.6/bbl in 2015-21, see Fig. 2), while those who don’t are at a disadvantage to their Asian peers, who are now increasing their take from Russia. When it comes to margins, there is a mixed picture within the region: according to our estimates, the refining margin in Rotterdam has soared to $185 per tonne (+340% YTD), while in Mediterranean countries, which continue to rely mostly on Urals as the preferred feedstock for cracking purposes, it has jumped from $23 to $330 per tonne (see Fig. 3).

Even if we leave aside differences in configuration and, hence, the refined product mix, spreads between product prices and feedstock costs continue to widen, and this is especially true for Urals. As seen in Fig. 4, the average price gap between a tonne of gasoline and a tonne of Urals was around $670 in June, compared with $170 six months ago, while in the case of Brent it was around $500. Middle distillates show the same trend, with a tonne of kerosene and diesel fuel priced at a premium of $730 and $630 to Urals vs. $565 and $455 to Brent, respectively.

So refiners in Europe are earning lucrative margins and have no plans to shift to lighter oils, which is quite understandable, considering the region’s focus on reducing dependence on hydrocarbons for power generation in the coming decades. Meanwhile, they are betting on Iranian Light, a medium sour grade, as they transition from Russia’s heavy crude. The nuclear deal has re-emerged in the headlines this week. Should the new round of talks with Iran come to a standstill, a shortage of heavy oil grades will become an even more real threat, and the Urals discount to Brent will narrow as the ban on seaborne imports of Russian crude oil takes force.

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