Margins are Sky High, but Restructuring Carries On

abarrelfullabarrelfull wrote on 21 Apr 2015 08:10
Tags: europe refinery total

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Refiners, especially in Europe, are enjoying margins that haven't been seen since Lehman Brothers was last in business. Nobody is sure how long they can last, but everyone is enjoying them whilst they last.

The long levity of these market conditions are of particular interest to those who need to make tough decisions over their assets. Do they keep refineries running, or do they continue with plans to reduce capacity? If you believe that the margins will last for a while, then postponing refinery closures would make sense.

Total is obviously a company that is not overly optimistic about the sustainability of the current benign environment:

Three of Total’s five refineries in France — Gonfreville in Normandy, Grandpuits in the Paris region and Feyzin near Lyon — demonstrated their ability to withstand the deteriorating economic environment in 2013 and 2014 and generate ongoing income streams. The other two, Donges and La Mède, are struggling and are structurally loss-making.

Le Mede Refinery, is therefore going to be closed, whilst Donges Refinery will be upgraded.

It seems that Total has a similar view to Wood Mackenzie, who as reported by Bloomberg are expecting a sharp correction by summer.

U.S. plants, ending seasonal maintenance, will push down European prices with rising exports, particularly of diesel and jet fuel, as they eat into a domestic stockpile of almost half a billion barrels of crude. The shipments will help reduce the continent’s third-quarter processing margins by about 42 percent

In the long term, the continued closures are good news for those who remain in business. However, the short term pessimism is based on a belief that the glut of US crude will continue. For this excess to remain, we need two things to be true:

  1. US oil producers must be able to make money at the current price
  2. There will be no developments that ease the export of crude oil

I am personally not sure that we can rely on these two factors. Distortions in the market are keeping production levels in the USA up, but gravity has to kick in at some point. Meanwhile flexibility in crude exports solves a huge number of problems and logic has to push this one to a head.

In the meantime, European refiners will count their money whilst watching rig counts obsessively.

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