Poor gasoline demand will see refiners cut, close

LONDON (Reuters) - A golden age of profits for western oil refining companies has ended and many are likely to face cutbacks and even possible closures, analysts said on Friday.

Falling demand for gasoline globally has come just as more refinery capacity comes on stream, piling on the pressure.

The global economic crisis allied with record high oil prices earlier this year have slashed gasoline demand and curbed future growth projections, forcing refining margins for motor fuel deep into negative territory.

European refiners such as Total and Petroplus have already started planning to cut back runs on unprofitable products like gasoline and its blending component naphtha. Analysts said it could be the beginning of a longer-term trend and margins could collapse over the next 2 years.

"Perspectives for demand are much more limited, which will clearly put refining margins under pressure," said Cambridge Energy Research Associates (CERA) director of downstream oil for Europe, Olivier Abadie.

"CERA forecasts a decline of up to 40 percent of refining margins in 2009-2010 from 2007-2008."

Refiners have enjoyed strong earnings in recent years as the rapid development of China and India have stretched supplies of petrol products, leading to a raft of new refining projects being planned whilst demand was booming.

Oil industry consultants Wood Mackenzie said that they now project that refining capacity will expand at a faster rate than demand for at least the next 5 years.

"There are now serious concerns that capacity additions are significantly outpacing demand growth out as far as 2014," Wood Mackenzie said.

"The impact of this will be reduced utilization rates in those regions were demand growth is slowest, namely the U.S. and Europe."

GASOLINE GLUT

National oil companies (NOCs) in the Middle East, Asia and Africa are behind much of the predicted 12 million barrels per day of new crude distillation capacity by 2014.

NOCs tend to be influenced more by energy independence and security than commercial returns, but this is likely to leave a glut of gasoline on the market.

Existing, complex refiners in the U.S. and Europe have already started converting capacity away from gasoline and naphtha toward profitable middle-distillates like diesel and heating oil, boosted by renewed demand due to the long-term switch to more efficient diesel cars in Europe.

However, analysts have warned that smaller, gasoline focused refineries could be forced to shutdown.

"A lot of refiners in the U.S. who are geared to a 75 percent gasoline yield could go out of business," said Francisco Blanch, head of commodities research at Merrill Lynch investment bank. "We've already seen some pushed out of the market and there will be more."

"We will continue to see run cuts in the short-term as we are still constrained in our ability to switch production from gasoline and naphtha to middle-distillates."

The majority of new refining capacity coming online over the next 7 years is geared toward middle-distillates as well as gasoline, which could deal a double-blow to refiners according to Blanch, with heating oil and diesel margins also coming under pressure.

With the outlook looking bleak for the refiners in the United States and Europe some analysts have questioned the future direction of the industry in the West.

"How quickly demand recovers and how much rationalization occurs in the short-term are key to determining how many (if any) new refineries will be required post 2015," said Wood Mackenzie.

(Reporting by David Sheppard; Editing by William Hardy)