Negative economic sentiment and deepening concerns about global growth have been gathering steam in recent weeks, exerting downward pressure not just on Brent crude oil prices but also on refining margins, Bank of Americal Merrill Lynch said in a report.Even with a heavy turnaround season, margins have failed to find strength lately. In addition to weak demand in the US, Europe and Asia, the under performance stems from the return of the Amuay distillation unit and higher gasoline output in Europe, the report noted.
“Going forward, we see little upside to light product crack spreads, particularly gasoline,” BofAML said in a report.
With the help of refinery closures, the collapse in oil demand in Europe has not translated into stock builds. Indeed, the decline in oil demand in recent years has been closely matched by multiple refinery shutdowns with more than 1 million b/d of refining capacity closing in Europe since 2009.
But refinery shutdowns may now have run their course with no further closure likely in 2013 or 2014. Thus while demand continues to fall, Europe’s refining system is now starting to stabilize.
This widens the gap between capacity and demand for petroleum products. Unless refiners reign in output, product inventories could start to rise.
To make matters worse, Europe’s refiners could be squeezed by a rise in US gasoline output and a surge in refining capacity in Asia and the Middle East, both of which could back out European exports of petroleum products.
The expansion in refined product capacity in Asia is worrying also in light of the recent slowdown in Chinese oil demand, leading to significant product exports. Chinese exports of both products have surged this year and the country is now a net diesel exporter.
In sum, BofAML expects these structural issues to cap the upside of forward margins in the short and medium-term.
This is particularly the case for gasoline, which is in a rising surplus in Europe. We would view any improvement in margins as temporary, providing refiners with an opportunity to hedge.
Source: Bank of America Merill Lynch