The recent surge in refining margins in Europe and the US could be short-lived as support from a spate of plant outages gives way to continued underlying weak demand for fuels, Shell's CFO Simon Henry said Thursday.
"We think this rally has been driven at least as much by capacity outages, such as the PDVSA fire in Venezuela and hurricanes on the Gulf Coast, rather than by stronger demand conditions," Henry told reporters on a conference call.
"We're seeing evidence of the weak economy all around us in our downstraem marketing and our chemicals business, so the downstream rally overall could be short-lived," he said.
High levels of planned maintenance shutdowns in Europe and unplanned incidents in US plants, have all conspired to sustain margins US and Europe during the third quarter, Henry said, adding, however that "they are not sustainable factors over time."
A deadly explosion at Venezuela's Amuay refinery, owned by state-run PDVSA, in August shut the country's biggest refinery for more than a week.
On demand, Henry said global crude demand growth remains less than 500,000 b/d a year, compared to some 1-2 million b/d/year of underlying oil demand growth until the financial crisis hit the world economy in 2008.
"European demand is pretty weak across the board, including chemicals, with very few signs of recovery. North America has stronger industrial demand but on the retail side it's relatively weak," he said.
European oil majors have seen their third quarter earnings supported by the recent surge in regional refining margins while some US refiners have benefited from huge crack spreads as a result of a surge in US oil output which has depressed inland crude prices.
On Tuesday, BP reported record downstream earnings on the back of strong refining margins which it said are at four-year highs.
France's Total, Europe's biggest refiner, said Wednesday that the European refining margin indicator rose to Eur51/mt ($66/mt) during the quarter, nearly four times the margin of Eur13.4/mt seen in the same period of 2011.
The company said the stronger margins, which were also 34% higher than in the second quarter of this year, stemmed from a relatively high level of maintenance work at European refineries and an increase in demand from the US.
In the US, Henry said he sees only a limited, short term impact on fuel distribution sites which have seen some flooding and damage from storm Sandy.
"Sandy might extend the (margin) rally a little bit but that's hopefully just a one-off factor," he said.
Henry said he also expects the massive margins being enjoyed by US refineries with access to cheap WTI-priced crudes, returning to normal levels as new pipeline options to bring the light crudes to the US Gulf Coast are completed.
