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May 19, 2021

Whether it’s more traffic on the roads, brighter economic readings, or persistently strong freight activity, Europe’s battered oil refineries are finally looking at some relief from Covid-19 and the devastation it wrought on petroleum demand.

A measure for the profit plants make from turning crude oil into diesel has doubled since late March, a bullish signal that’s all the more important in Europe because the continent’s refiners churn out twice as much diesel as they do gasoline. Oil traders report that the region’s crude oil demand is also picking up again.

 Even in jet fuel, the industry’s problem child since Covid-restrictions hit global aviation, there are tentative signs that the gloom is beginning to clear. When the pandemic hit, it destroyed fuel demand and hastened the demise of some plants that were already pressured by refining capacity expansions in Asia and the Middle East.
 “There’s light at the end of the tunnel,” said Mark Williams, principal analyst for short term refining and oil products markets at Wood Mackenzie Ltd. “The upside is reliant on people not only driving, but starting to fly.”
Across Europe, there are signs that road traffic is increasing. At the end of last month, U.K. fuel sales hit their highest since the country first went into lockdown, while toll road usage in France, Italy and Spain all recently reached their strongest in months versus 2019 levels. In another bullish signal, euro zone manufacturing expanded at its fastest pace in April since at least May 2018.
 That’s all good news for diesel-type fuel, which in Europe is used in passenger cars, freight and some heating. The continent’s refiners make more than twice as much diesel as gasoline, according to the International Energy Agency.

The agency sees the continent’s total oil demand rising by more than 9% this quarter and almost 4% in the next. Several European crude traders said demand for physical cargoes from the region has strengthened in the past few weeks.

Europe’s plants would be doing even better if yields were more weighted toward gasoline -- as they are in the U.S. -- because profits from making the fuel are around $10 per barrel, partly thanks to the strong recovery in consumption on the other side of the Atlantic, a key export market for Europe.

Even with Europe’s diesel focus, refining margins for Spain’s Repsol SA and Poland’s Grupa Lotos SA still rose in April. So did those of Austria’s OMV AG, which expects better profits in the second half of this year. OECD Europe’s crude processing volumes are also set to see a “substantial increase” next quarter, according to the International Energy Agency. Wood Mackenzie sees them closing in on 2019 levels.

There are even signs of a tentative improvement in the jet fuel market. The continent’s refiners originally slashed the amount they produce from every barrel of crude in response to the pandemic. Those yields are now starting to recover. At Europe’s plants, the yield of jet, and, kerosene -- used to make aviation fuel, and for heating in some parts of the world -- hit a ten-month high in February, and is likely to rise.

“May, June, July, I would expect an improvement,” said Hedi Grati, a director at IHS Markit. “But I don’t expect them to get anywhere near the 9%” that was seen in January 2020, he added. The continent’s flight numbers are still only about 38% of pre-pandemic levels, according to data from Eurocontrol, though air travel is starting to open up.


Despite the improving picture, Europe’s refining industry still faces significant headwinds.

Since the pandemic began, there have been announcements of plant closures in France, Belgium, Finland and Portugal and of capacity reductions in the Netherlands and U.K. More will almost certainly follow, with new refineries coming online in Asia set to flood the continent with cheap fuel, potentially eroding profits for local plants.

“Margins in Europe remain weak for the foreseeable future,” Williams said. “Weaker, more simple refiners, with lower complexity, which don’t have petchem integration -- they’re on the chopping board.”

Source: Bloomberg
Image Source: Getty Image