Warsaw/London-08 November 2016: European refiners’ fourth quarter results are likely to be strong due to the combination of planned maintenance shutdowns, healthy demand and improved fuel oil crack spreads, Fitch Rating says. A significant jump in margins is particularly beneficial for medium-sized integrated oil and gas companies, but we expect margins to fall back in the first few months of 2017.
Margins in northwest Europe reached USD8.5/bbl in early November from USD6.7/bbl in October and an average of USD4.4/bbl for the third quarter of 2016. The growth in October was particularly significant because it came when oil prices were rising, which would normally lead to lower refining margins as fuel price movements tend to lag behind oil prices.
We believe a drop in capacity due to heavy maintenance work in both Europe and the US has helped margins. The International Energy Agency expects global refining throughput in the fourth quarter to be 1.1 million barrels lower than in the third quarter. Product demand growth slowed across Europe in 2016 after an exceptional 2015, but it has still been supportive for the continent’s refiners, especially in certain markets such as Poland. PKN ORLEN, for example, reported a 4.8% increase in demand for gasoline and diesel in 9M16.
Fuel oil production in Russia has also declined recently as some refiners have completed asset modernisation programmes that allow them to produce a greater proportion of more refined end-products. As a result, fuel oil crack spreads improved markedly in October, pushing refining margins higher.
Refiners using Urals crude, mainly in central and eastern Europe and the Mediterranean region, continue to benefit from the favourable discount of Urals crude to Brent prices. The differential was USD2.5/bbl in October, on a par with the average for 9M16, but 64% higher than in 2013-2015. The differential results from strong Russian crude oil supply and rising competition from other high-sulphur crude types, including increased supplies from the Middle East. We believe it will remain wide at least until the oil market reaches balance.
Improved financial results will help medium-sized integrated oil and gas companies with stronger refining cover reduce their financial leverage, which has been under pressure in recent quarters. But as maintenance season draws to an end, margins will fall back and we continue to expect them to average around USD4.5 a barrel in 2017.
