* European refineries to cut runs by nearly 25 pct in summer
* Refiners seek alternative sources of crude to help profits
* More Latin American crude moves to Europe
By Ron Bousso
LONDON, June 3 Caught between soaring crude
prices and collapsing diesel profits, European oil refiners are
slashing operating rates by nearly one quarter ahead of the peak
Europe's refining sector has battled for years with
weakening demand and over-capacity which forced a string of
plant shutdowns. Further closures may be looming.
This year alone, Hungary's MOL Group shut down its Mantua
refinery in northern Italy and the Milford Haven refinery in
Wales stopped processing crude as its owner Murphy Oil
seeks buyers for its British assets.
A convergence of rising crude oil prices to around $110 a
barrel with extremely low diesel refining margins,
usually the bulwark of profits, are wreaking fresh havoc.
"We have had weak refining margin environment particularly
in the last couple of months and it is driven by weak diesel in
particular," Matti Lehmus, executive vice president for oil
products at Finnish refiner Neste Oil, told Reuters.
Refining capacity in the Mediterranean region is set to drop
by up to 25 percent this summer, whether by lowering operating
rates or extending maintenance at plants, according to refiners
and analysts. In coastal areas in northwest Europe, refineries
are set to cut runs by around 15 percent.
European refining crude processing rates in June are set to
reach 10.76 million barrels-per-day (bpd) or 76.3 percent of
capacity, little unchanged from the peak maintenance months of
March-May, according to data from Wood Mackenzie consultancy.
By comparison, operating rates in June 2013 reached 11.99
Runs are expected to rise to 11.12 million bpd or 78.8
percent of capacity in July but remain significantly lower than
the previous year's 12.14 million bpd or 85.7 percent of
capacity. Similarly, runs in August will rise to 11.35 million
bpd or 80.4 percent of capacity compared with 11.83 million bpd
in August 2013, according to the data.
"When margins are like this you try to do as much of your
shutdowns and turnarounds in a time like this," said Marcel Van
Poecke, managing director at Carlyle International Energy
Partners, which specialises on European downstream investments.
"How long can you keep doing this? At a certain moment
you've done all the maintenance you could do ... the only thing
left to do are run cuts."
Persistently high crude prices in the region have weighed
heavily on refining margins.
Refineries in northwest Europe made $2 in profit for each
barrel of Brent crude processed in May. In the Mediterranean,
refineries processing Russian Urals made 12 cents a barrel on
average in May, according to Reuters data,
That has led several refiners to seek alternative, cheaper
Cargoes of Vasconia crude from Columbia, Maya from Mexico
and Oriente from Ecuador have sailed in recent weeks to Europe,
mostly to the Mediterranean, according to traders.
The flow of Latin American crude to Europe has steadily
risen over the last year as booming domestic output has cut
demand for imports in the United States.
Repsol will this month test the first batches of
Western Canada Select (WCS) heavy blend at its Spanish
refineries as it takes advantage of a provision that allows
Canadian crude to be re-exported through U.S. ports.
"European refiners have to look to alternatives. Canadian
supplies are slowly becoming more available to the market and
the Latin American players have to reroute some of their exports
away from the U.S.," said David Wech, managing director at
Vienna-based consultancy JBC Energy.
"Perhaps you can make a cheap buy at the beginning of such
an inflow but in a few months the costs would increase," he
THINGS CAN GET WORSE
In Europe diesel refining margins have hovered near a
two-year low at around $10 a barrel in recent weeks.
Huge flows of diesel from highly competitive refineries in
the U.S. Gulf Coast, Russia and Asia, that benefit from cheap
crude feedstock, have kept supplies in Europe up and pushed
Imports from the U.S. are expected to reach above 2 million
tonnes in May for the first time this year, according to
shipping data and traders.
The flow is set to increase this summer as U.S. Gulf Coast
refineries ramp up runs following the maintenance period.
"Diesel looks long and the situation will probably get worse
before it gets better... I would anticipate U.S. arbitrage
supplies to remain high until autumn maintenance," said Robert
Campbell, analyst at London-based Energy Aspects consultancy.
And with more refining capacity coming on line in Asia and
the Middle East over the next year, diesel margins are set to
remain under pressure.
Around 2 million bpd of additional refining capacity, the
equivalent of 10 medium-sized plants or nearly 15 percent of
Europe's current capacity, will need to shut in the next four
years to balance the market, analysts say.
(Additional reporing by Claire Milhench and Lin Noueihed,
editing by William Hardy)