REFINERY MARGIN TRACKER: European refiners look to buy local crude as freight costs eat into margins

High freight rates and strong distillate demand have European refiners cutting back on US crudes, opting instead for local crudes like Forties or Russian Urals as they return from seasonal turnarounds, an analysis from S&P Global Platts showed Nov. 1.

An added incentive to running heavier, more sour crudes is the higher distillate cracks produced as heating season demand kicks in. These higher cracks compensate for more expensive European natural gas needed to run many plants, while additional demand from gas-to-liquid fuel switching at some plants increases distillate cracks even more.

Northwest European refiners running North Sea Forties crude showed a $1.54/b margin advantage over West Texas Intermediate for the week ended Oct. 29, according to Platts Analytics data.

Waterborne vessels floating in the North Sea after loading Forties crude faced competition from Urals for placement. But the rising price of Urals – with less available due to a shorter loading program – is creating an advantage for Forties.

For the week ended Oct. 29, the Rotterdam Urals coking margins averaged $6.99/b for the week ended Oct. 29 compared with the $7.80/b for Forties, Platts Analytics data showed. And while NWE cracking margins for WTI MEH averaged $7.16/b, the yield of the lighter, sweeter crude is more geared to gasoline than distillates.

Freight rates to bring Urals to NWE Europe averaged $2.58/b for the week ended Oct. 29, Platts Analytics data showed, while moving crude from the USGC to NWE cost $2.61/b. Both are well above the $1.02/b to move Forties to local plants.

Run rates to increase

So given these current economics, as European refinery utilization picks up as seasonal turnaround work ends, US crude producers are not likely to benefit from the increased crude demand.

Flows of crude from the US Gulf Coast to Northwest Europe refineries averaged 448,000 b/d for the week ended Oct. 29, 200,000 b/d lower than the week earlier, according to commodity tracking data Kpler.

"Refinery downtime for the region, including normal maintenance, idled units, and discretionary run cuts, will decline by around 80,000 b/d to a level of 850,000 b/d as some refineries have recently restarted from planned turnarounds," according to S&P Platts Analytics.

"Another decrease of 90,000 b/d is expected for the following week, with total downtime reaching a new low for the year of 760,000 b/d," Platts Analytics said.

European demand returning

Increased European refining utilization is being matched by increased European demand for refined products, according to US refiner Phillips 66. Phillips 66 has a 16% interest in the 58,000 b/d MiRO refinery located in southwestern Germany, as well owning retail marketing outlets.

"In terms of marketing, we continue to build retail in Europe," said Phillips 66 CEO Greg Garland on the Oct. 29 third quarter results call.

"As people come back in overseas, we're seeing Austria at 2019 levels of demand. Switzerland 2019 levels of demand. The UK as well. Germany is still off by about 5% but it's coming back as well," he said.

Phillips 66's second European refinery is the 221,000 b/d Humber refinery, in northeastern England, which due to its configuration, is not dependent on natural gas to operate.

"It's actually the most efficient refinery we have in the fleet," said Robert Herman, Phillips 66's head of refining on the call.

Herman noted that the plant has a large gasoline-making fluid catalytic cracking unit as well as three cokers, "all of those are fuel generating units."

"And so at the end of the day, the Humber does not buy a lot of natural gas to run the refinery," he added.

However, there is some impact for power purchases and steam for the cogeneration plant next to the plant, Herman said, adding that the moderating of cracks from cogen is a "headwind, but not a large headwind by any means at Humber."

But the increase in natural gas prices in both Europe and Asia has caused gas-to-liquids fuel switching, with some refiners using fuel oil as power sources, which account to between 500,000 b/d and 1 million b/d of incremental demand globally, which also support higher distillate cracks, according to Phillips 66 estimates.

In October, the Humber refinery brought in 226,000 b/d of crude, with early month cargoes coming from the US Permian Basin and then tapering off to more local crudes like Grane, Gullfaks, and Norne as freight rates rose, Kpler data showed.

So far in November, Phillips 66 is bringing in about 600,000 barrels of North Sea Grane into Humber, Kpler data showed.