Paris January 19 2022: European refinery margins rose as increased natural gas supply tamped down the region’s record-high prices, reducing the cost for many of the plants dependent on the fuel to operate, boosting margins and increasing exports of refined products from the region, an analysis by S&P Global Platts showed Jan. 18.
About 80% of all European refineries depend on natural gas to power their plants, with refineries located in the big oil refining centers like Northwest Europe’s Amsterdam-Rotterdam-Antwerp getting virtually all their power from natural gas.
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They have been hamstrung by the record-high price of natural gas in Europe. However, increased imports of LNG are helping lower prices.
“European demand elasticity has finally emerged as global LNG buyers find opportunities to burn cheaper fuels or temporarily lower industrial output. This was key to allowing TTF to rise to a premium to JKM last month, triggering the current rise in LNG deliveries to Europe,” said Platts Analytics in a research note.
ARA refining margins for Urals and WTI MEH rose for the week ended Jan. 14, according to Platts Analytics margin data, with Urals coking margins averaging $7.76/b compared with $7.52/b a week earlier.
Regional refinery variable costs, which include refinery power expenses, dropped to $1.55/b for the week ended Jan. 14 compared with $1.86/b the week earlier.
ARA cracking margins for WTI MEH also improved, averaging $7.72/b for the week ended Jan. 14, up from $6.81/b the week earlier. The lighter, sweet crude quality for WTI MEH reduces the amount of power needed to process the crude, with variable costs receding to $1.14/b for the week ended Jan. 14, compared with $1.40/b the week earlier.
Europe’s key natural gas benchmark, the Dutch TTF contract, which averaged a record high of $31.14/MMBtu in Q4 2021, has dropped, averaging $27.78/MMBtu so far in Q1 2022, according to Platts assessment data.
In Asia, the JKM price which serves as a benchmark for LNG prices in the key LNG markets of Japan and Korea, averaged $34.89/MMBtu in Q4 2021. It has fallen in Q1 2022 and averages $26.06/MMBtu for the quarter to date.
While Northwest Europe LNG prices remain at a premium to the JKM price, increasing supply into Europe, concerns remain. European importers face a shortage of slots for LNG into the region, keeping a floor under the TTF price. European gas held in storage also fell to 47.6% of capacity, compared with over 60% during the same period in 2021, while unplanned outages at the North Sea’s Troll field were extended, market sources said.
The price spread for LNG cargoes from the US Gulf Coast, which were assessed by Platts at a $2.58/MMBtu discount to TTF in Q4 2021, has widened to an average $2.95/MMBtu discount so far in Q1 2022, according to Platts price assessments.
More demand from gas-to-fuel switching
European margins were also supported by increased demand caused by gas-to-oil fuel switching, as more refiners use fuel created at their plants as a power source.
Platts Analytics estimates that in January, gas-to-oil switching will add 500,000 b/d of demand in the global market, with European refiners accounting for about 150,000 b/d of that.
While USAC Urals cracking margins averaged $10.20/b for the week ended Jan. 14, according to Platts Analytics, stripping out the cost of RINs due to the Environmental Protection Agency’s Renewable Fuel Standard, the margin fell to $6.53/b, below that of Northwest Europe Urals margins.
Natural gas prices on the USAC due to colder-than-normal weather are also eating into margins, averaging $2.01/b for the week ended Jan. 14, up from the $1.54/b over the week earlier.
As margins between the USAC and Northwest Europe narrow, exports of Northwest Europe gasoline and diesel are rising. According to commodity tracker Kpler, clean product exports from Europe to the USAC are expected to average 517,000 b/d for the week ending Jan. 21, 203,000 b/d higher than the week earlier.
