Lower runs in Europe on heatwave help boost margins

Lower runs at refineries in southern Europe following a recent heat wave have added to other supply constraint factors and helped boost margins, according to analysts and market sources.

The International Energy Agency said the "recent extreme heat events" were one of the factors, alongside low stocks, unplanned outages and loss of Russian feedstock, contributing to "supply curtailment" and stronger refining margins.

"Consequently, early August currently sees refineries benefiting from a margin environment that eclipses almost any other period except 2022," the IEA said recently in its monthly report.

Diesel and gasoline cracks surged in late July whereas high sulfur fuel oil cracks turned positive in early August, the IEA said.

Southern Europe faced extreme temperatures in July which exceeded 40 degrees Celsius. While the heat has since abated, temperatures in the area remain in the low 30s C and were set to climb above 35 C before the end of August.

"Overall, we have lowered crude runs estimates by a couple of percentage points for a number of Mediterranean countries," the IEA said.

Some refineries across the Mediterranean were continuing to run at lower rates after cutting throughput in the second half of July due to the high temperatures, said market sources.

"Refinery runs now sit at around 80%-90%," one source said.

With another heat wave forecast at the end of August, runs will likely remain capped for the coming few weeks. "Refineries are being extra cautious for the heatwave coming up at the end of August," the source said.

"Refineries do not like hot weather ... Their running rates are low, so it is good for the margins as well," TotalEnergies CEO Patrick Pouyanne noted last month during a call with investors.

During a recent conference call, officials at Italy's Saras, which runs the Sarroch refinery in Sardinia, said plants in the Mediterranean, North Africa and the Middle East were affected by the heat wave and could not run at maximum capacity.

Traders noted that the heat is also affecting operations of secondary units, such as FCCs and hydrocrackers.

ARA ULSD cracks closed at $32.9/b on Aug. 16, having gained around $10/b since mid-July, according to S&P Global Commodity Insights data. On Aug. 16, ARA gasoline cracks were at parity with ULSD, at $32.7/b, having climbed $9/b in a month.

According to Rebeka Foley, an oil analyst at S&P Global Commodity Insights, diesel cracks were showing "counter-seasonal strength in all hubs, with gasoline cracks also robust in all key hubs except Singapore."

The ARA ULSD cracks in Europe have been stronger than gasoline throughout August, Foley said. "What we are seeing is a signal that supply is not keeping up with demand, especially after pandemic refinery shutdowns, recent outages, and as the region grapples with the loss of Russian crude."

Even though demand was not fully back to pre-COVID levels, "runs are clearly not high enough to accommodate demand, which has pushed cracks higher," Foley said.