Cheap crude prices and strong gasoline demand will continue to keep most refineries on both sides of the Atlantic in the black in 2016, analysts say, but weak diesel profit margins in Europe and on the US East Coast will keep refineries on the closure watch list as more efficient facilities come online.
US gasoline demand, which been much stronger than forecast, is expected to retain some of that strength in 2016, according to Barclays' Paul Cheng.
"We believe that the global gasoline market's strong momentum could extend into the next couple years as the worldwide demand and supply balance continues to tighten," the analyst wrote in a recent note.
"While we think the global gasoline demand growth rate will likely slow from this year's exceptional run rate, we forecast demand could continue to outpace supply increases in 2016 and 2017," he added.
2015 was "an exceptional year" for refining margins in Europe, but also globally, according to Jonathan Leitch, research director at Wood Mackenzie. The low oil prices boosted refined products demand which "grew quicker than expected," Leitch added.
Based on Wood Mac's calculations, which go back to 1995, "it will be strongest year" for the Northwest European cat cracking margin.
"Some refiners say it's the strongest margin throughout their history of operations," Leitch added.
After a strong showing earlier this year, profit margins at Atlantic Basin refineries are weakening. In the fourth quarter of 2015, the Arab Light cracking margin averaged $6.97/b on the US Atlantic Coast. On Wednesday, these margins were narrowing, with USAC margins at $4.85/b, Platts margin data show.
By comparison, Amsterdam-Rotterdam-Antwerp refiners earned only $3.44/b in Q4 processing Arab Light.
Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co..
The USAC coking margin for Arab Light was $9.34/b Wednesday, compared with a $11.24/b Q4 average, Platts data show. However, the amount of coking capacity along the USAC is small, only about one-tenth of its 1.1 million b/d refinery capacity and only PBF's refineries in Delaware City, Delaware, and Paulsboro, New Jersey, are able to process heavy, sour crude.
"This gives PBF a crude slate advantage as it allows those plants to process heavy crudes which have been highly economic for refiners for most of 2015," said Tudor Pickering Holt analyst Chi Chow.
"All other East Coast refiners are generally, light sweet crude plants ... tight Bakken and Canadian crude differentials will likely shut down or erode the economics of railing in alternative North American crudes," he said.
TPH estimates USAC gasoline cracks will average $15.40/b in 2016, with the first quarter crack averaging $13.05/b, and regional diesel cracks averaging $13.63/b in 2016, with a Q1 average of $13.50/b.
Atlantic Basin refineries include plants on the USAC, the East Coast of Canada and in Western Europe, all regions that have seen facilities close over the past six years due to poor economics.
Corral, the parent company of the Swedish refinery operator Preem, said margins had weakened to "normal seasonal levels" after a significant increase in Q3. "The strength in gasoline prices versus crude oil weakened towards the end of the third quarter," it said.
GASOLINE KEEPS CACHET
Recent US gasoline demand has been supportive of the refining complex in both Europe and the US East Coast as colder, seasonal weather supportive of distillate cracks has just started to appear.
A four-week moving average pegged US gasoline demand at 9.156 million b/d for the week that ended December 25, compared with 8.866 million b/d in the year-ago period, US Energy Information Administration data show, while distillate demand rose to 3.895 million b/d for the past four weeks from 3.860 million b/d in the same period last year.
Traditionally, European refiners are structurally long when it comes to producing gasoline, often considered a necessary byproduct of making diesel. Much of Europe's output ends up on the US East Coast, where it competes with Colonial Pipeline barrels from US Gulf Coast refiners.
Gasoline, which for years has been the "least wanted product" for European refiners, suddenly saw demand surge in 2015, said Energy Aspects.
While the consultancy expects 2016 to "have a strong showing," it expects gasoline cracks "to come off their recent highs, as the supply situation is improving in the Atlantic Basin while demand is moving down in line with normal seasonal patterns."
Energy Aspects' head of oil products research Robert Campbell said with European refineries coming back after maintenance, and work in the Middle East also wrapping up, "it is very hard to be bullish gasoline."
US gasoline imports from Europe and other regions are falling, averaging 479,000 b/d for the past four weeks compared with 723,000 b/d in the year-ago period, as regional refiners return from work even though demand is up.
The front-month NYMEX January RBOB futures contract was trading at $1.255/gal at midday Thursday, up 2.5 cents from Wednesday's settle in thin trade before the New Year's Day holiday.
US East Coast refineries ran at an average rate of 87.3% over the past four weeks, producing 3.081 million b/d of the finished motor fuel compared with a 83.8% rate a year earlier, which produced 2.99 million b/d of gasoline.
Meanwhile, new refining capacity is coming online in other parts of the world from both traditional and non-traditional gasoline suppliers.
Expectations are mounting that gasoline exports from players like Russia will also rise as a number of secondary units come online.
DIESEL'S DEMAND DEMISE
Warmer-than-normal weather around the globe is doing little to support distillate margins. "Heating demand is not there," said Campbell.
Most of the refinery capacity due online in the next five years will focus on making diesel, giving gasoline-heavy Atlantic Basin refiners some breathing room.
But while gasoline has been the star product for European refineries this year, they are still not ready to bid diesel farewell.
Shell's investment in a solvent de-asphalter unit at its Pernis refinery in the Netherlands was motivated by persistent strong demand for diesel as a fuel for vehicles, despite lower than expected demand.
Barclays estimates global gasoline demand growth rates will be 2.0% annually, compared with 1.5% for the distillate market while refining capacity additions will be predominantly concentrated on distillate production.
A recent study by Turner, Mason & Co. and SBC notes the global refining system is growing slightly faster than demand, creating a market imbalance.
"It is likely that during the next five years, several refineries will be closed for a variety of reasons, which will narrow this imbalance even further. New refineries, particularly in the Middle East, tend to be large and often have advantaged crude feedstock prices," the study said.
But despite strong margins, some refiners see the writing on the wall.
Some Italian refiners feel the threat of closures is not over even after a number of refineries shut in the past few years. Italian oil company association Unione Petrolifera earlier this year estimated an excess of capacity in the refinery sector of some 20 million mt.
The structural surplus is "still a long way from being resolved," Lisa Orlandi, senior economic analyst at the Ricerche Industriali ed Energetiche think-tank, said, adding that new closures cannot be ruled out.
