Lighter crude slate restricts European refiners

Europe's refining system has been running a progressively lighter crude slate since seaborne imports of Russian Urals were banned by the EU late last year, and this is having a knock-on effect on refinery runs, yields and margins.

Seaborne crude arriving at European ports, including Turkey, had a volume-weighted average gravity of around 35.9°API last month, according to Argus calculations based on Vortexa tracking data. That compares with an average 35.3°API across the first half of the year, 35.1°API across the whole of 2022 and 34.6°API in 2019.

The lighter intake reflects how US light sweet grade WTI is now capturing much of the market share lost by medium sour Urals. Last month the US grade accounted for around 17pc of seaborne crude arrivals in Europe, including Turkey, up from 10pc a year earlier. Urals' share fell to 2pc from 8pc over the same period. Local grades such as Norway's Johan Sverdrup and Grane are much closer substitutes for Urals in terms of gravity and sulphur content, but Opec+ production cuts have pushed up sour crude values globally in recent months and this has helped further boost WTI's market share in Europe.

But the lighter crude intake is mismatched with the configurations of many European refineries, forcing some to cap crude throughput to accommodate their limited capacity to produce the lighter ends of the barrel such as naphtha. European refiners were operating at about 82pc of nameplate capacity in July, according to IEA data and Argus research, compared with 88pc in the same month of last year. As well as lighter crude slates, other contributing factors include extreme temperatures, unplanned outages and logistical challenges involved in replacing Russian crude.

With crude runs under pressure, gasoline prices in northwest Europe reached the highest premium against the North Sea Dated benchmark in 13 months in July, diesel premiums hit the highest in four months and jet fuel the highest in five months. At the same time, most European refineries are now struggling to take full advantage of their upgrading capacity, as lighter crude slates produce less heavy feedstocks for secondary conversion processes such as vacuum distillation and cracking.

The trend of crude intakes growing lighter has inverted naphtha and fuel oil yields in Europe this year. Naphtha comprised around 10.3pc of total refined product output in the EU-15 and Norway in the first half of 2023, according to data from Euroilstock, up from 9.5pc across the whole of 2022. Fuel oil, on the other hand, comprised only 9.4pc, down from 10.4pc. As a result, high-sulphur fuel oil (HSFO) barge prices have soared to an average premium of around $14/bl against naphtha cargoes in northwest Europe so far in August. Market participants say European naphtha production is likely to grow further in the coming weeks, potentially opening arbitrage economics to export the surplus to Asia.

HSFO barges have priced above North Sea Dated crude on half the assessment days in August so far, something not previously seen since the 1990s. Naphtha's average discount to Dated was $15.71/bl in July, the widest in eight months, and it has remained around there in the opening days of August.

Dwindling production of HSFO in Europe has coincided with the seasonal peak in fuel oil demand for power generation in the Middle East, and renewed concern over diesel supply in Europe is encouraging refiners to upgrade as much HSFO into diesel as possible.

By Benedict George