Published — Friday 22 March 2013
Last update 22 March 2013 2:15 am
LONDON: European oil refining margins are likely to stay depressed this year after retreating in the last month due to an increase in excess capacity, Goldman Sachs said in a note.
The bank said that gasoline cracks declined by $ 12.44 per barrel, or 67 percent, from February highs by March 13, but have rebounded $ 3.67 per barrel since then.
According to Goldman, around 530,000 barrels per day (bpd) of refining capacity has been shut down on average each year over the past three years, but that it expects a small cut in refining capacity in 2013.
“Consequently, while European refining capacity has stabilized since the beginning of the year, demand continues to fall sharply, and as a result we expect that the wedge between European refining capacity and European product demand will open going forward.”
Further darkening the outlook the report said that the usual gasoline exports to the United States were unlikely to support prices for long.
“Higher exports are unlikely to sustainably help European refiners as they suffer from much higher costs compared to their US peers,” it said.
European gasoline prices remain lower than the US benchmark RBOB price, leaving arbitrage profitable even after a spike in US ethanol blending credits, or RINs (Renewable Identification Numbers).
US refiners and blenders are required to blend ethanol into gasoline. But an increase in required blending quotas and a drop in gasoline demand have led to a spectacular rally in the value of the RINs since the end of 2012.
From a marginal cost of around 3 cents per gallon at the end of last year, RINs prices rose to more than $ 1 a gallon earlier this month, becoming a major drag on RBOB prices.
Refiners will need to cut runs in order to prevent a glut in stocks.
“European refiners will need to reduce their output in order to prevent product inventories from building, which would likely create continued downward pressure on European product margins over the medium term,” the bank said.
Goldman added that margins for distillates would be more robust than those for gasoline, in part because of lower stockpiles.
“We believe this has been driven not only by distillate inventory levels being even lower than those of motor gasoline currently, but also by the expectation that this relative tightness will persist going forward,” the note said.
It said that distillate demand has declined more slowly than other products, down only 2.3 percent year-on-year in 2012, compared to a 6.9 percent decline in gasoline demand, and that the trend has continued in January and February this year.