REFINERY MARGIN TRACKER: European margins end the week lower on omicron concerns, run cuts possible

European refining margins declined in the week ended Dec. 3, weighed down by concerns of what impact the omicron coronavirus variant could have on oil demand, an analysis from S&P Global Platts showed Dec. 6.

While the US Center for Disease Control continues to track omicron, saying it does not know how easily it spreads, S&P Global Platts Analytics expects global demand in Q1 2020 to be weaker.

In Europe, restrictions have begun to tighten, with Austria reviving a national lockdown, and other countries adding mask and vaccine mandates.

For the week ended Dec. 3, Northwest Europe refining margins for Urals rose 20 cents/b week on week to average $5.50/b, while CPC Blend refining margins in the Mediterranean averaged $6.04/b, up from the $5.88/b average for the week ended Nov. 26, according to margin data from Platts Analytics.

However, day-on-day margins for both NWE Urals and Mediterranean CPC Blend were lower, as fears of the rapidly spreading omicron variant continued to roil markets. NWE Urals dropped from $6.05/b on Dec. 2 to $5.55/b on Dec. 3, while CPC Blend fell from $6.71/b to $6.16/b during the same time period.

While aggregated regional margins remain healthy, European margins for refiners most exposed to gas prices are zero or even negative right now, said S&P Global analyst Rick Joswick.

"But if they can't switch, they may just cut runs," he added. By switching, he means refiners are burning the LPG produced at the plant in lieu of buying natural gas and running their reformers harder to consume more naphtha.

And for fuel switching there is "limited capability/regulatory ability to use oil fired furnaces," he said.

Platts Analytics forecasts fuel switching for users between natural gas and fuel oil is about 500,000 b/d, but that is mostly at power plants and mostly in Asia, with refineries accounting for between 100,000 b/d to 150,000 b/d globally.

US refiners benefit

According to JP Morgan analyst Phil Gresh, despite rising clean product inventories and a weakening in demand, US refiners are expected to benefit from European margin weakness.

"The good news for US refiners is European margins have continued to fade enough on omicron concerns that it appears to be prompting discussions of run cuts in the region of as much as 10% to 20%," he wrote in an Dec. 5 report.

Global gasoline exports from NWE for the week ended Dec. 3 averaged 862,000 b/d, down 122,000 b/d from the week earlier, according to Kpler commodity tracking data. Of that, 206,000 b/d was destined for the US Atlantic Coast, which was 122,000 b/d lower than the week earlier.

USAC gasoline imports from Mediterranean refiners rose by 17,000 b/d to reach 65,000 b/d, Kpler data showed, with two cargoes going into New York Harbor.

USAC cracking margins for Bonny Light softened but surpassed those in Europe. For the week ended Dec. 3, they averaged $10.34/b, down from $11.88/b a week earlier.

At this point, Asian margins appear immune from run cuts as margins remain healthy. Southeast Asian Urals cracking margins averaged $3.65/b for the week ending Dec. 3, up from the $3.03/b the week earlier.

"Asian refiners are reportedly not yet considering run cuts, though this could change if the omicron threats grow," Gresh added.