Feature: Weak European refining margins prompt run cuts, crude values slide

London — Weak middle distillate margins as a result of of COVID-19 and IMO 2020 have seen some European refiners cut throughput ahead of the traditional spring maintenance season, hitting values for North Sea crude.

Crude demand in China in February was down almost 3 million b/d year on year, data from S&P Global Platts Analytics showed, and, with the low product crack environment, trading sources have been discussing the impact of European refineries cutting runs to counteract weak margins.

European jet fuel cracks, which typically hold pole position for refinery margins, have underperformed, with the front-month CIF NWE jet cargo crack assessed at $8.63/b Tuesday, its lowest since September 12, 2016.

Ongoing reduced air travel demand in China has shunted the limited prospects for jet fuel requirements in the country and product has moved into storage in Singapore. Traders, however, have questioned when Europe will begin to look like the more profitable outlet for the barrels.

"We need to store the excess somewhere. It should be in Europe or east of Suez," one trader said, while a second said: "I see massive arrivals end of March, early April".

Looking at diesel, the FOB ARA 10 ppm barge crack was hovering around multi-year lows Tuesday at $9.68/mt, up from $8.34/mt on February 27 which was the lowest since June 8, 2017.

"[Diesel] price direction is not clear. No doubt demand is down. It is whether refinery margins will overcome it. Fact is, you have run cuts," a third trader said. "There is also fear of new build [refinery] capacity in the East, although that could be slowed down due to coronavirus."

In addition to coronavirus damaging demand for middle distillates, IMO 2020 -- the lower, 0.5% sulfur cap on marine fuel globally since January 1 -- has failed to tighten diesel and gasoil markets.

Middle distillate demand has not materialized as shippers have transitioned relatively smoothly to 0.5%S fuel oil, rather than use 0.1%S marine gasoil, although some middle distillate has made its way into fuel oil blends.

The FOB ARA barge 0.1%S gasoil crack was assessed at $8.3/mt Tuesday, having also hit a low since June 2017 of $6.89/mt on February 27.

Demand for 0.1%S gasoil has been poor this winter as temperatures remained unseasonably mild, reducing demand for heating.

Crude impact

Values for crude in Europe have come under pressure from the run cuts and concerns that coronavirus is not just hitting demand in Asia, traders said.

"The physical sweet [crude] market is easing quickly in the North Sea," a trader said. "Margins are horrid, the worst seen in a while."

"Most of the European refiners are now cutting [runs]. Margins are well into negative territories," a trader said, adding that while China was starting to look towards buying some crude, "other areas are starting to suffer from COVID-19 problems".

Forties was indicated to local buyers in Northwest Europe at below a $1/b discount to Dated Brent, while Brent was indicated at parity with Dated Brent.

Oseberg, Ekofisk and Troll were also expected to drop to compete with other grades such as WTI Midland and Azeri Light which had been landing in Rotterdam at premiums to Dated Brent of $1.20/b and $2/b, respectively, a trader said.

While some refineries may simply reduce their run rates, others have made the decision to either bring forward their turnarounds or resell crude barrels they originally planned to run through their own systems, traders said.

Market participants noted that the full impact of the coronavirus has not yet been realized in terms of global crude demand.

"We do not know what will happen with coronavirus and if it will get considerably worse," one trader said.