EU/diesel: loss of Russian imports supportive for independent refiners

On the whole, the ban on Russian crude oil has worked well. It has lowered revenues for Russia without causing the global oil price to spike. The upcoming ban on importing Russian distilled products into Europe, scheduled to kick in on February 5, may cause more disruption — but boost independent European refiners such as Italy’s Saras and Hellenic Petroleum and Motor Oil of Greece.

The reason the crude ban has worked well is that oil is easy to move around the globe. There are plenty of producers, importers and ships. Banned Russian oil simply made its way to Asia — at a steep discount — freeing up other oil cargos to fill the European gap.

Switching gears on diesel is not the same. Ships which carry oil products are smaller, and designed for short hops. It takes diesel more than 40 days to get from Russia to China, compared to only six to Europe. Limited supplies of these “clean” tankers mean rates are already rising. Russia may end up shuttering a chunk of refining capacity, with Asian refineries taking up the slack.

Dual-scale chart showing that higher oil refining margins are boosting profits and share prices. Left-hand scale shows both EU refiner share prices (%, rebased) and EU refiner 2023 ebitda (earnings with interest, taxes, depreciation, and amortisation) estimates (%, rebased). Right-hand scale shows EU refining margin ($ per barrel). Jan 2021 to Dec 2022.

Any disruption to the diesel market spells high prices for Europe, which is structurally short of the product. It consumes 6.4mn barrels of diesel a day, against production of about 5mn barrels. The balance comes from imports, including some 700,000 from Russia.

Europe will need to cover that hole in a tight market. Partly to blame is the recovery in air travel. Refineries now aim to produce as much jet fuel as they can, at the expense of the diesel portion.

Two charts. First shows the Profits from oil refining. 2023 operating profit (%) for Refining & Trading and Fuel retailing for companies Repsol, Eni,  Shell, BP, Total and Galp. Second chart shows EU refiners, share prices ($ terms rebased) for companies Repsol, Eni, Motor Oil, Saras and Hellenic Petroleum. Jan 2022 to Jan 2023.

While high diesel prices will be a headwind for Europe’s economies in 2023, refiners will do very well out of it. European integrated oil majors have a smaller exposure to refining than they did. But for some — including Spain’s Repsol — it is still sizeable: 11 per cent of Repsol’s 2023 ebit will come from refining, according to Bernstein. Independent refiners such as Saras, Motor Oil and Hellenic Petroleum are even more geared to diesel, as it is more than half of the fuels they produce.

Refining stocks have picked up pace again in recent months. They should have further to go before they reach top speed.


Business Asia
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