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Northwest European refining margins at lowest this year: sources


By Olivier Lejeune, Benno Spencer, Natalia Beales, Ellie Weir and Joel Hanley in London


June 15, 2011 - Refining margins have dipped to their lowest level this year to the point where trimming runs or closing refineries temporarily may be considered, Northwest European refiners told Platts on June 14.


They cited high Dated Brent prices and bearish naphtha values as the main reasons for the fall in margins, with the recent rise in Brent futures also seen as a contributing factor. (See related chart: Forward Dated Brent - June 14).


"Brent crude is too high for Northwest European refiners...no one is buying," a source at one of Europe's main refiners said. "We've already trimmed runs, the next step is to just shut down some refineries," he added.


The source said complex refining margins for Forties crude in Northwest Europe stood at minus $4/barrel, with margins for Russian Urals crude at minus $2.50/b.


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Deteriorating Urals complex refining margins had also led to run trims in some Northwest European refineries, sources said, lowering demand for Russian crude exports.


"Complex refining margins for Urals are terrible...refiners would not cut runs if margins were positive, and there are run cuts," one Urals crude end-user said.


North Sea spot crude assessments - June 14, 2011


Another Urals trader added: "Gasoline and naphtha cracks are down, so Urals' [recent] price drop did nothing for margins in the grand context of things. There will have to be run cuts, there already are and some refiners were slow to cut back but think the rest will join."


Dated Brent was assessed at $120.80/b June 13, the contract's highest level since May 4, Platts data showed.


Russian Urals / ESPO spot assessments - June 14, 2011


However, despite the high price, itself largely a function of ICE Brent futures strength, Dated Brent was assessed at a premium of $1.01/b to August cash BFOE June 13, the basis contract of forward Dated Brent, Platts data showed.


This has meant higher feedstock prices for Northwest European refiners, while at the same time low naphtha cracks are keeping margins thin, sources said.


Forward Dated Brent - June 14, 2011


Naphtha CIF Mediterranean was assessed at Eur658.17/mt June 13, down around 8% from the beginning of May, Platts data showed. The poor outlook for refiners is not limited to Northwest Europe, said one West African trader.


"Demand looks overblown, margins are terrible," he said, adding, "with WAF grades trading so far out it can give a picture of what demand will look like when other crude loadings get to that point. If that is the case then demand looks terrible for everyone, the Eastern demand that has been propping up crude demand is not going to be there."


West African spot crude assessments - June 14, 2011


In addition, end-users in the Mediterranean reported the current CPC Blend levels, quoted by Platts at Dated Brent plus $0.625/b June 13, had squeezed refining margins making some refiners consider run cuts.


"Refining margins are awful, worse than in 2009 and 2010...everybody is or will cut runs but you can not do it instantaneously...the problem is also that on top of the bad cracks, the operating costs of the refineries are very high due to the high flat [crude] price," a refiner said.


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Table: European refined product prices






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