Europe's surviving gasoline-focused refineries get late boost

Mon Feb 4, 2013 12:42pm EST

* Gasoline crack strong after Hess refinery closure news

* Market may have "over-adjusted" after diesel investments

* Emerging markets unable to meet own gasoline needs

By Claire Milhench

LONDON, Feb 4 (Reuters) - A rush by Europe's refiners to switch to making diesel may have gone too far too fast, meaning the remaining gasoline-focused plants can prolong their lives by supplying rapidly growing Latin American and African markets.

As gasoline consumption has declined in Europe and the United States, refiners have been investing heavily in diesel production and closing gasoline units.

But with gasoline margins rebounding to unseasonally strong levels as more plants close, some analysts believe the market has "over-adjusted".

"The past year has seen a massive rise in gasoline cracks(refining margins)," said Johannes Benigni, founder of research house JBC Energy. "We would not be surprised to see another good year for gasoline-focused refiners."

Last year Europe's unloved "gasoline monsters" benefited when the the Coryton refinery in England closed for good.

This year, plans by Hess to close its Port Reading, New Jersey refinery in the United States in late February provided another reprieve as the Atlantic basin suddenly looks tighter.

The Eurobob gasoline refining margin was at three-and-a-half month highs on Feb. 4 at around $11.13 a barrel, while the U.S. equivalent, known as the RBOB crack , was at over $30 a barrel.

Normally margins are lower in winter when there is less demand.

"It's the seasonal low," one gasoline trader said. "If demand is really strong now, there won't be a barrel left come the summer."

The announcement from Hess meant that U.S. benchmark RBOB gasoline futures ended January up 6.13 percent, attracting more European gasoline cargoes to the U.S. East Coast, and giving European refineries an unexpectedly strong start to the year.

Soozhana Choi, an energy analyst at Deutsche Bank, noted that the Port Reading closure will come just ahead of peak spring maintenance, after which refiners typically ramp up production to meet U.S. summer driving demand.

The closure adds to an already sizeable list of mothballed refineries. Closures peaked in 2012 with 1.6 mln barrels per day of capacity, Choi said, but the trend has continued into 2013.

Shell plans to shut most of the units at its Harburg refinery in Germany at the end of March whilst several Italian plants already stand idle.

This has strengthened the hand of the remaining gasoline-focused refineries.

Germany is the biggest gasoline producer in Europe with some 470,000 barrels per day (bpd) in 2012, said Rob West, an energy analyst at Bernstein. Britain is second with some 420,000 bpd.

EMERGING MARKET APPETITE

Although gasoline demand in mature Western economies is declining, as consumers switch to diesel engines that are seen as more economical, emerging markets such as Nigeria, Egypt, India and Brazil are hungry for refined products.

Olivier Jakob, an analyst at Petromatrix, cited Mexico and Venezuela, which is still experiencing production problems after refinery explosions in 2012, as key buyers.

Some traders question the sustainability of the current strength in gasoline prices, saying it is linked to fund managers rotating into RBOB gasoline ahead of spring maintenance.

But gasoline cracks were also strong in September and October - bucking the usual seasonal trend - as refineries prioritised diesel production to make up global shortfalls.

This points to underlying structural issues, JBC Energy said. Recognising the decline in gasoline demand at home, refiners have been boosting diesel output - European hydrocracking capacity is up by 1 million bpd over the last decade, Benigni said.

Investments like that made by Portugal's Galp are typical of the trend. It has just finished an upgrade at its Sines refinery, which will make Portugal a net diesel exporter alongside Spain.

Meanwhile, gasoline demand in non-OECD economies excluding China is set to grow by about 200,000 bpd per annum over the next decade, according to JBC Energy.

This is partly because petrol is subsidised in many emerging markets, so there is no price-correcting mechanism.

As a result, demand for octane enhancers - gasoline components which produce higher quality grades of the fuel - is increasing, Benigni said.

Emerging market refiners lack the ability to produce this high octane gasoline themselves and must therefore import it.

Traders said the price of such components had been strong for months.

One called MTBE, which is blended into gasoline to raise the octane rating and reduce engine knocking, is a case in point.

This is currently expensive due to Venezuelan buying tenders driven by refinery outages, and gasoline's high premium to naphtha, which encourages blending.

"You need more octane when you blend naphtha into gasoline. So the wider the gasoline/naphtha spread, the more you can pay for MTBE," a trader said.

Shortages of blending components and restrictions on what can be used are contributing to low U.S. East Coast gasoline inventories, analysts say.

"As a result, we expect the seasonal swings in the gasoline margin to remain very pronounced," Benigni said.