European refining margins will moderate in the near term, but will remain above historical averages, Fitch Ratings says. Pressure on GDP growth, which affects fuel demand, remains the main short-term risk. Refiners’ long-term strategies will be increasingly influenced by the energy transition.

European refining companies posted record profitability and cash flow in 2022 due to a tight market and high fuel prices following Russia’s invasion of Ukraine and lower imports of fuels to Europe from Russia. The EU introduced a full ban on Russian fuel imports in February 2023, which will support refiners’ profitability, although at lower level than in 2022. Product prices, including diesels, have already reduced in Europe, as supplies from Russia have been replaced with imports from Asia and the Middle East.

PKN ORLEN and MOL are the larger and more diversified of the peers assessed, including vertical integration into the upstream and marketing sectors, so benefit from higher profitability. Tupras is less diversified, while KMGI’s margins are affected by higher competition in the Romanian market, leading to historically lower profitability than peers. However, KMGI’s profitability was boosted in 2022 and 2023 by the wider Brent-Urals spread, which affects the price of Kazakh crude oil, the main source of oil for the company.

.

All Fitch-rated companies in the sector are increasingly incorporating changes in the long-term energy output mix, including investing in biofuel and hydrogen production, higher petrochemical output and renewable energy production. They are also more focused on growing their retail network and non-fuel sales, and adding quick-charging stations. Some companies are also looking into new services. PKN ORLEN plans to grow a network of parcel delivery points to utilise the good location and density of its retail network. These strategies will influence the issuers’ profitability in the long term as margins vary among these low-carbon segments.
Source: Fitch Ratings