Refiners struggling to respond to price incentives: IEA

Refiners are seemingly unable to increase production even with this summer's soaring margins, the IEA said today, and this is acting to push product premiums to crude still higher.

The agency's refining margin indicator for northwest Europe — which accounts for some but not all costs — leapt by between 50-300pc in the April-July period, depending on the style of refinery, it said in its latest monthly Oil Market Report (OMR). There were smaller but significant margin rises at the US Gulf coast and in Singapore.

It said profitability at Europe's simple or hydroskimming refineries — those that lack capacity to upgrade heavy products — was the highest on record apart from in the immediate aftermath of Russia's invasion of Ukraine in 2022. This increased further in the early days of August when high-sulphur fuel oil (HSFO), traditionally the cheapest of the major products and the one that more complex refineries are designed to upgrade as far as possible, surged to a premium against crude.

The IEA said European refining is the "epicentre of the operational underperformance." It put average utilisation in European OECD countries at 81pc in June, with crude runs of 11.2mn b/d, down by 530,000 b/d from the same month a year earlier. The summer usually sees the year's highest refining rates, with a lull in planned maintenance work and heightened demand for transport fuels.

The agency said the outlook for European refining is "challenging", forecasting third-quarter crude runs in the region's OECD countries at 11.2mn b/d, lower by 600,000 b/d year-on-year. Other regions will face similar issues, although of smaller magnitude. The IEA forecasts runs in OECD Americas countries down by around 250,000 b/d year-on-year and those in OECD Asia Oceania steady.

The IEA said extreme temperatures in Europe, the US and China this summer have been a constraint on refinery runs, although it is waiting "to confirm the scale of the problem." Market participants in Europe have widely pointed to extraordinary temperatures generating technical problems, with air and water cooling less efficient under hot conditions. Recovery of the lightest products from atmospheric distillation may be disrupted, and the cooling of products before transport may be slowed.

EU and G7 sanctions against Russian crude and feedstocks are contributing to keeping refinery runs lower in Europe, particularly at plants that used to receive crude through the Druzhba pipeline. These must now substitute using seaborne deliveries to nearby ports. But a shortage of heavier grades, thanks to the Russian embargo and Opec+ production cuts, means the use of alternative lighter crudes puts pressure on light-product processing capacity and results in fewer heavy feedstocks for secondary conversion processes like vacuum distillation and cracking.

Most European refineries are mechanically unable to reap the full benefit of lighter crude for straight-run middle and light distillates, nor can they make full use of upgrading capacity they have installed.

European refining throughput has also been affected by a recent succession of unplanned unit outages. It is possible, although unconfirmed, that the challenges of pandemic lockdowns, followed by the economic pressure to maximise processing in 2022, have hindered rigorous maintenance work at some sites.

By Benedict George