Refiners poised for record profits


The Russian-Ukrainian conflict has deeply penetrated global crude and product markets. Producers, traders, shippers, refiners and even consumers must all adapt to changing crude and product flows – and prices.

Our refining analysts Alan Gelder, Mark Williams and Gerrit Venter walked me through what’s going on and how they think things will play out.

First, very few volumes of Russian crude and products have been pushed out of the market. Petroleum, like gas and coal, is exempt from official sanctions, although the United States, Japan and South Korea have imposed import bans. Many countries and companies aim to reduce their dependence on Russian crude and products by the end of 2022.

About 1.0 million b/d of total Russian crude exports of 4.6 million b/d is now self-sanctioned. These are mainly barrels from the Urals intended for European refineries.

Volumes will increase to 1.2 million bpd when TotalEnergies sources alternative raw materials for its Leuna refinery in Germany, currently served by a dedicated pipeline from Russia.

Separately, some of the 1.0 million bpd of diesel produced in Russian refineries and exported (again, mostly to European markets) is also self-sanctioned.

Traders face difficulties in dealing with Russian volumes, including credit and logistics – some shipowners do not allow their ships to dock in Russian ports. Most crude and diesel, however, are still coming to market, according to our water data.

Self-sanctioned buyers are still required to buy the contracted oil, some of which could take months to complete. In the meantime, they will likely reduce contractual drawdowns to minimal volumes and the rest will have to be sold in the spot market. Spot volumes of Urals crude and Russian diesel will only increase over time.

Second, we have seen huge swings in crude price differentials over the past five weeks as refiners scramble to find alternative feedstocks. Prices for Ural and Dubai rough are generally about the same in their regional markets, reflecting their similar quality. Brent, the global crude oil price, has historically commanded a US$2-3/bbl premium for both.

Any rise in the price of oil like that of the past few weeks will tend to widen the differentials: Dubai is now trading at a discount of 10 USD/bbl against Brent while the discount of the Urals against Brent has exploded at 30 USD/bbl.

The opening of such a massive differential between Urals and Dubai crudes reflects the huge risk premium the market needs to transact Russian cargoes.

Third, current market conditions look very optimistic for refiners. The self-sanction triggered the diversion of Russian diesel exports destined for Europe to other regions. Europe was suddenly faced with a diesel shortage in the main ARA market (Amsterdam/Rotterdam/Antwerp), where storage volumes were already low at the end of winter.

Diesel prices have soared to attract volume to the European market and drive up refining margins. This effect has spread across the world, and most refiners should benefit from it.

Our global composite refining margin averaged US$15/bbl in March, five times higher than the annual average for 2021 and among the highest monthly values ​​on record. There are regional variations, but refining markets in Asia and the United States have each experienced margin expansion of a similar magnitude.

The high costs of natural gas and carbon emissions could tarnish European margins. And across all regions, volatile and complicated trading conditions could also dampen earnings.

The leverage of oil and gas companies on margins varies based on geographic exposure and individual refining assets. Our downstream business modeling suggests that at current refining margins, Supermajors could generate more cash flow from refining in the second quarter of 2022 than they have had in an average year since 2016. adds to the record upstream cash flow we expect. Upstream and refining margins rarely reach record high margins simultaneously.

Fourth, high prices are a threat to global oil demand and the longer these prices remain high, the greater the threat. The first signs will appear at the gas pump, and it is clear that motorists everywhere are already feeling the pinch. The demand for diesel is less elastic with respect to prices, consumption being weighted to the distribution sectors as well as to industry.

Fifth, we do not expect a return to free flow of Russian crude and product exports until Ukraine’s independent nation status is resolved.

Given the multiple challenges, it will take a few months for the oil market to find a new balance. It is already adapting – Urals crude that is not wanted in Europe will go to Asia, Middle Eastern crudes and US WTI are increasingly heading to Europe, and diesel exports could find an outlet in other diesel-deficit markets such as Africa and even Latin America.

The reality, however, is that the global crude oil and products system has suddenly become more complicated, less efficient and more expensive. This will affect prices.

A new market is emerging for shipments of Russian origin. Pricing agencies already provide quotes for Russian products, with Russian diesel at discounts of over US$20/tonne.

Finally, what is the outlook for oil prices? Brent was extremely volatile for five weeks, trading between 99 USD/bbl on February 23, the day before the invasion, to an intraday high of 139 USD/bbl in early March.

At the current price of 108 USD/barrel, we estimate that there is probably a “Russian premium” of up to 20 USD/barrel for Brent. Uncertainty surrounding the war and the potential responses of different governments is likely to persist for some time.

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