* Refiners to begin cutting margins in New Year
* Plunge in profitable diesel wiping out margins
* Stubbornly high crude oil exacerbating pain
By Julia Payne and Jessica Donati
LONDON, Dec 21 Plunging diesel prices have
driven refining margins in Europe down sharply, and refiners are
preparing to cut runs in a bid to stem losses heading into the
Product prices were strong at the end of summer as seasonal
maintenance, outages at major refineries abroad and the loss of
three plants of insolvent refiner Petroplus kept the region
In November, however, most of the region's largest plants
returned to full capacity, flooding the market with products.
Diesel barge premiums in northwest Europe crashed from a
more than four-year high of over $60 a tonne in October to as
low at $16 a tonne in December, Reuters data shows, hitting
refining margins badly.
"If we see an impact it will be at the beginning of 2013 ...
At the current economics, it (refining cuts) will come at some
stage," said Olivier Jakob, an analyst at Petromatrix in
Diesel is one of the more profitable refined products in the
region, and companies across the continent are investing
billions in refinery upgrades to be able to produce more of the
Swings in diesel prices, therefore, can tip refining margins
into the red, because refiners sell other products derived in
the refining process, such as fuel oil, at a loss.
"Margins are the poorest in some six to nine months," one
trader said. "For a while it was good due to seasonal
maintenance and Petroplus being out, but all the refineries
returned to capacity except Coryton."
Refining margins vary between plants. Newer refineries can
produce a greater proportion of high-value products and are most
able to cope in difficult times.
Those in a weaker position are currently operating at a
loss, according to analysts and traders, who frequently cited
plants in Italy and Greece as the most likely candidates to
begin cutting output.
"The Mediterranean is pretty weak, and they also have a big
problem with domestic demand - if you look at Italy or Spain.
They will be quickly impacted by negative margins," Jakob said.
Italian oil and gas giant Eni did not want to
comment on its refineries. Its third-quarter report did address
the issue of falling demand and expensive crude.
"Management expects to reduce processed volumes at the
company's refineries ... in response to falling demand and a
negative trading environment," the report said.
Several Italian refineries have already closed or been
marked for closure in 2013. Api's 80,000 barrel per day
Falconara Marittima is due to shut for a year in January, and
Total-Erg has already idled its refinery in
Saras, another Italian refiner, said margins were
poor but had not turned negative at its Sardinian plant.
"As long as margins are above zero, if you run, you cover at
least one part of the fixed costs," a spokesman for Italian
refiner Saras said.
Greek refiner Hellenic declined to comment.
But run cuts are expected beyond the Mediterranean. Traders
say some plants further north are already running at reduced
They listed France's Lavera, run by Ineos; the Netherlands'
Pernis, run by Shell ; and Preem's refineries in Sweden.
All three companies said they could not comment on daily
operations at their plants.
Adding to weak product prices, European refineries -
particularly those in the Mediterranean traders say - have also
had to deal with high oil prices.
Spot differentials on most of the region's major crude
grades have not weakened nearly as much as product prices.
Throughout December in the Mediterranean, lower exports on
sweet and sour grades put a floor on differentials to dated
Brent, the global benchmark for most physical crude trades.
Kazakh CPC Blend, for example, hit a more than one-year high
due to a shorter loading programme and transportation
disruptions on its Tengiz stream.
A sudden drop in Es Sider and El Sharara output in Libya in
mid-December further tightened the availability of sweet crudes
in the region, and traders expected January exports to be
The shortages have temporarily erased the effects of the
U.S. shale oil boom, which has freed up a lot of light sweet
In sour grades, Russian Urals exports will decline in the
first quarter of next year, and less will flow to Europe as
Russia shifts exports to Asia, where margins are stronger.
The drop in Russian supplies is compounding problems
sourcing sour crude in the region, which is already coping with
the loss of around 600,000 bpd of Iranian imports.
"In Europe almost 1.3 million barrels per day of capacity
has shut down since 2008 and another 0.5 million bpd of capacity
is under threat," Petr Steiner, a refinery expert at Hart Energy
told a recent conference in Hamburg.