December 21, 2012 / 4:06 PM / 5 years ago

Christmas cheer ends early for Europe's refiners, cuts ahead

5 Min Read

* 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 (Reuters) - 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 new year.

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 tightly supplied.

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 Switzerland.

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 distillate.

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.

Party Over

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 Rome.

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 capacity.

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 significantly reduced.

The shortages have temporarily erased the effects of the U.S. shale oil boom, which has freed up a lot of light sweet crude.

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.

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