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Feature: European refining margins drop, but no run cuts yet

London β€” * Q2 margins deteriorate but still 'decent'
* Low prices boost consumption
* Utilization to remain high

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European oil companies have been unanimous in their second-quarter financial reports about how refining margins deteriorated in the period and are fairly subdued about the future. Yet despite widespread talk of run cuts, there has been little evidence to suggest they are actually taking place.

"We need to see a sustained period of proper depressed margins before cuts," a trader said.

A middle distillates broker said: "It may take a bit of time before they decide to do that."

Article Continues below...



As far as numbers are concerned, companies have been vocal about the negative impact of margins on their operating results. "The reduction was primarily due to the drop in prices for oil and gas and lower refinery margin," Statoil said.

But at the same time many reported improved sales of oil products against a background of lower crude prices.

PKN's retail sales, for instance, increased 4% year on year to 2.1 million mt, due to 6% growth in the main Polish market and growth of 16%, 9% and 5% respectively in the Czech Republic, Lithuania and Germany.

Neste said: "Relatively low crude oil prices are expected to continue supporting product demand."

BP also reported a "stronger fuels marketing performance," but added that it had failed to offset the "significantly weaker refining margins."

LIMITED MAINTENANCE IN H2

But while refiners are skeptical about whether prospects will improve in the third quarter and the rest of the year, many are managing to improve results through various trading strategies and optimization.

"I don't think margins will fly," said Carlos Gomes da Silva, CEO of Galp Energia, Portugal's largest oil and gas company. However, due to some "contango activity" the company undertook in the first half of the year, it expects to retain a premium over the benchmarks.

Eni's refining and marketing division reported a higher Q2 operating profit year on year "due to optimization and efficiency initiatives as well as higher availability of processing plants." But while the Italian refiner expects lower refinery runs for the rest of the year due to planned turnarounds, elsewhere maintenance has been largely completed.

After carrying out in the first half of the year maintenance works that had been planned last year but delayed due to healthy economics, it looks like the maintenance program in the second half of the year will be low key.

Shell expects a "lower planned maintenance" in the third quarter compared with the same period last year after increased Q2 maintenance resulted in reduced "refinery availability."

Repsol has completed its 2016 maintenance program "in all of its facilities in Spain," while Italy's Saras said its Sarroch refinery would operate at normal levels during the second half, with all major maintenance work complete.

Neste has also completed a scheduled major turnaround at its Porvoo refinery and plans to run the plant "at high utilization rate, with no major maintenance shutdowns scheduled," even though it expects the reference margin to be somewhat lower in the second half of 2016.

And even though 2016 looks less favorable than the bumper 2015, as one trader said, "refiners have seen that margins can be much worse."

Another market source said: "Margins are still decent."

As some US refineries announce plans to cut runs, "in Europe, everyone is waiting; no run cuts are officially announced yet," another source said.

DIESEL, FUEL OIL PROVIDE SUPPORT

In a turn of fortunes, fuel oil cracks have only recently provided some impetus to margins. European fuel oil cracks rose to a 22-week high last week, largely as a result of falling crude prices and the tight supply outlook for fuel oil in the Northwest European market.

Meanwhile, fears of run cuts added strength to the diesel market.

"The entire [diesel] market was in upswing mode" on concerns of potential run cuts, a trader said.

There is still talk of run cuts, but "you don't want to be the first one to cut," another trader said.

--Elza Turner, elza.turner@spglobal.com
--Caroline Knight, caroline.knight@spglobal.com
--Maude Desmarescaux, maude.desmarescaux@spglobal.com
--Edited by Jonathan Fox, jonathan.fox@spglobal.com