Oil at $70 Proves Too Hot to Handle for Some European Refineries

(Bloomberg) -- Oil's surge to $70 a barrel has left plants that process crude in Europe struggling, as their margins plunge and demand weakens for some of what they make.

The slump is most evident in the market for fuel oil, which is used in shipping and by power producers. Diesel also isn't helping as high inflows of the fuel from the Middle East are capping those margins. The slump in profitability could start to curb refinery runs, according to KBC Advanced Technologies.

Refining margins have fallen to the lowest in 3 years, according to Barclays, which says fuel oil demand is being hit as crude rises. So-called hydroskimming refineries are particularly vulnerable to the slump in fuel oil because they are less able than complex refiners to convert fuel oil into diesel or gasoline.

"Fuel oil cracks are paltry, which is impacting hydroskimming margins, with Urals margins in particular falling," said Ehsan Ul-Haq, London-based director of crude oil and refined products at researcher Resource Economist Ltd. Russian Urals has a higher fuel oil yield than other crude grades, making it more sensitive to weakness in the fuel oil market.

Mediterranean hydroskimming refineries running Urals were losing $2.04 per barrel on Jan. 11, the least profitable rate since May 2016, according to data from Oil Analytics Ltd. High sulfur fuel oil's discount to Brent, another indicator of refining profitability, has also slumped since late August.

Barclays' refining margin indicator in NW Europe tested August 2016 lows at $1.14 a barrel last week, it said in a note on Tuesday.

"Oil demand usually slackens in the first quarter and into the second quarter, so sooner or later refinery intakes will have to slacken and the usual signal for that is lower margins," according to Stephen George, chief economist at KBC Advanced Technologies. Simple refineries, those plants with lower capacity to convert crude into high-value products, will suffer the most, he said.

High imports of fuels like diesel from the Middle East are also capping profits for European refiners. Shipments of fuels from that region to Europe are forecast to rise in January to the highest in at least a year, according to tanker tracking and fixture data compiled by Bloomberg.

"Given refiners have been trying to maximize runs to take advantage of the especially good margins in the last couple of years -- now with lower margins, we could see slightly lower run levels all around," says Salih Yilmaz, an analyst at Bloomberg Intelligence.

To contact the reporter on this story: Bill Lehane in London at blehane@bloomberg.net.

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, Rachel Graham, John Deane



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Bob  |  January 18, 2018
So why are pump prices riding?


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