Refining marigns have slumped after showing initial strength in Q3-2014 despite fall in prices, according to a report by Deutsche Bank.The Med region showed the biggest fall in margins followed by Northwest Europe, US Gulf Coast and Singapore.Even though margins declined last month, LLS cracking refining margins in the US Gulf Coast still look strong and are currently at the top end of their 5 year range. We find that all light sweet crude margins are currently attractive in the US Gulf Coast. Gasoline and diesel contribution to the margins have increased whereas fuel oil and LPG contribution show a decline.

The story with heavier crudes such as Mars and Maya is different, since these show an improvement over recent weeks but nevertheless continue to look poor and stand at thebottom end of the 5 year range. The arbitrage for Mars crude vs Mexican crude (Maya) looks neutral at the moment. This implies that the Gulf Coast refiners do not have a preference between these grades. The arbitrage for EU crudes such as Forties and West African grades like Bonny Light looked open in the beginning of the month but at the moment look closed, albeit marginally.

Margins for North West Europe (NWE) also show a downward trend in the recent past. These margins were suffering from the start of the year but started to pick up from mid August. "However, according to our model, simple margins are now in negative territory and this we believe will put pressure on the physical side ofcrude demand from refiners. However, we like to point out that in the last few days the margins have shown a slight increase due to increased fuel oil and middle distillate contributions. We believe gasoline spreads will negatively impact margins as we head into seasonally poor winter demand and coupled with the fact that refineries return from autumn maintenance. The crude arbitrage for West African crude like Bonny Light looks open to NWE. The arb for Urals also looks open to NEW," Deutsche Bank said in the report.

Meanwhile in the Med, we also see margins significantly driven downwards by product weakness. The crude arbitrage for Forties and Saharan Blend to the Med looks closed at the moment whereas the arbitrage for Azeri BTC and West African grades looks open. The arb for Urals to the east which was open for quite some time has now flipped shut in the past week. "We think the poor margin environment might drive refiners to extend their autumn maintenance which could prove bearish for Urals."

In Asia, cracking margins have fallen by more than $2/bbl in the past month. An increased contribution from Jet and Diesel was observed but this was outweighed by the negative contribution from other products, especially Mogas. On the contrary, margins for lighter sweeter crude like Murban look healthy and currently stand in the middle of its 5 year range. "We believe a surplus of light sweet crude has helped to narrow the premium for Murban versus Dubai. The arb for Forties and Bonny Light to Singapore looks closed at the moment and it suggests that local grades are more preferred to Asian refiners. "According to Platts, the market is already seeing weakening trades for Angolan crude oil from regular buyers in Asia. With inter regional crude arbs closed to Asia, as local refineries come out of maintenance we believe this will create a demand for local grades due to expected higher crude runs and create downward pressure on margins.
Source: Deutsche Bank