June 28, 2012 / 1:48 PM / in 6 years

Analysis: Brief boost for Europe refiners from crude drop

LONDON (Reuters) - A sharp fall in crude oil prices has gifted European oil refineries a surprise profits surge in June, briefly bucking longer term decline, in a timely bonus for traders Vitol and Gunvor who have bought plants.

The strong margins, however, are expected to be short lived as refined fuel prices adjust lower, helped by refiners boosting output to cash in on the windfall, and Europe’s dwindling oil demand reasserts itself.

Nor is the trend stable enough to attract further new investors in the sector following the recent wave of refining asset purchases.

International benchmark Brent crude futures have fallen about 25 percent in May and so far in June, briefly touching an 18 month low late last week.

That helped European refining margins to surge to the highest level since late 2008 in June, according to energy consultancy Wood Mackenzie.

Jonathan Leitch, a senior analyst with the consultancy, said the lack of sustained increase in European fuel demand and an expected ramp up of refinery runs using large surplus capacity would soon pressure refining margins down.

“The strength of margins can be very short lived. It will last until crude oil prices stabilize. That potentially could be this week,” Leitch said.

“Margins are so strong because of the fall in crude prices. What we normally see is when crude prices increase sharply, margins fall and conversely when crude prices fall sharply, margins increase sharply. A large part of it is that effect,” he added.

Wood MacKenzie’s calculation showed moderately complex refiners in northwest Europe have made a profit of $6.40 by processing one barrel of light, low-sulphur North Sea Brent crude so far in June, compared with the average profit of 10 cents per barrel last year.

Highly complex margins for medium, high-sulphur Russian Urals crude have been a profit of $13.10 a barrel so far in June, compared with the 2011 average of $8.70.

Strong cracks, or relative values of specific products such as diesel and jet to crude oil can attract an increase in product imports from Asia to Europe.<PRO/E>

Opportunities for European oil companies to export refined oil products to their traditional markets the United Sates and West Africa have fallen, pointing to weaker margins forward.

The poor market has led to a run of European units throwing in the towel.

Britain’s Coryton refinery is the latest, formally run by now insolvent Petroplus PEPFF.PK, and to be sold as an import terminal.

That followed Exxon Mobil’s (XOM.N) move earlier in June to decommission one crude distillation unit in its UK Fawley site in September.

Three former Petroplus sites have been sold as refineries to Geneva based traders Gunvor and Vitol VITOLV.UL with AtlasInvest.

They are likely to capture the high margins with restarts of the sites in Germany, Switzerland and Belgium between them.

Analysts said, however, that their example alone was unlikely to convince other investors with long-term strategic views to buy other refining assets in Europe, and that the restarts of these sites would weigh down margins eventually.

“We expect that the higher margins will be temporary and therefore there should not really be any significance attached them,” Roy Jordan with Facts Global Energy said.

“They may gladden the hearts of the companies which have just purchased the previously idled refineries but I doubt whether the current strength would encourage a further rush of investors into the sector.”

Roughly 20-25 percent of Europe’s total refining capacity has been idle over the past year, according to industry monitor Euroilstock, which uses 13.1 million barrels per day (bpd) as base.

Reporting by Ikuko Kurahone, editing by William Hardy

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