Crumbling refinery profits threaten OPEC-led crude rally

22/01/2018 16:22 AST

The recent OPEC-led rally in crude prices is hitting refinery profits hard, flashing warning signs over oil's bull run.

A wave of refinery maintenance scheduled in spring could also put downward pressure on crude, analysts said.

Higher oil prices typically quench consumption and squeeze profit margins at refiners that convert the feedstock into gasoline, diesel and aviation fuels.

Benchmark profit margins in key refining hubs dropped sharply in recent weeks - by over 50 percent in the U.S. Gulf Coast and northwest Europe, Reuters data shows - increasing expectations that some refiners will reduce operating rates.

"Margins have suffered and the biggest factor behind the weak margins we've seen is the run-up in crude prices," said Jonathan Leitch, research director with? consultancy Wood Mackenzie.

Crude prices have gained more than 50 percent since June, as production cuts by OPEC and a number of non-OPEC oil producers increasingly bite into global inventories.

But while crude stocks tumbled at increasingly higher rates throughout 2017, refineries around the world continued to run at record levels to meet demand and lock in strong margins.

The lag between the gain in crude prices and the decline in refining margins led in turn to a rise in stocks of products.

In the fourth quarter of 2017, refinery runs hit a record 81.5 million barrels per day (bpd), International Energy Agency data shows, tipping fuel supply into excess and sending cargoes into storage tanks after a year of drawdowns.

And according to analysts FGE, fuel stocks in Europe, Singapore and the United States built by some 27.5 million barrels in the first two weeks of 2018.

Stocks are expected to grow further in coming weeks, a trend exacerbated by the rising oil price, which Wood Mackenzie says leads shippers to save fuel by reducing vessel speed and prompts power plants to use cheaper energy sources instead of fuel oil.

"Refining margins are looking very shaky," a European trader said. "Everyone's asking each other about run cuts."