Low Oil Prices are a Boon for European Refiners

abarrelfullabarrelfull wrote on 08 Dec 2014 13:02
Tags: price refinery

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Since oil prices have started falling, European Refiners have been extremely happy, as product prices have not fallen in step, and this has led to refinery margins that they haven't enjoyed for years. This effect is however, undoubtedly temporary. As Crude settles into a new normal, the product prices will eventually catch up and margins will fall to lower levels.

There are a number of reasons, however, why I think that the new price environment will be helpful for Europe's beleaguered refiners.

  1. Rapid rising crude production in the USA, gave us a huge Brent/WTI spread, and American refiners a massive advantage. The spread is now miniscule
  2. Europe's natural gas is largely sold at Crude Oil indexed prices. These will come tumbling next year, reducing energy costs. Relative to US competitors, the disadvantage will be much less.
  3. US gas producers rely a great deal on good prices for liquids. With lower liquids prices, gas production will decrease, increasing prices
  4. Russian refinery upgrades are creating stronger competitors, as the capability of producing Euro V compliant fuels increases. The combination of sanctions & low prices will slow this trend to a crawl
  5. Working capital needs will be less, particularly important for heavily indebted companies.
  6. Europe suffers from cyclical demand destruction, especially in the South. Low oil prices will spur demand
  7. Oil producers headlong rush into refinery investments will slow down as they need to preserve their cash

All in all, Europe's refiners will enjoy a much better 2015 than most of the recent years, whilst US refiners will see most their advantages reduce or disappear.


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