London, 23 October (Argus) — Europe is becoming engulfed by a second wave of Covid-19, triggering fresh travel restrictions and pulling down transport fuel margins. This makes for a bleak outlook for regional refiners already struggling with low products demand.
Covid-19 cases in the UK, France, Germany, Italy, and Spain all registered highs in recent days. France is in a state of health emergency, with curfews in Paris and other major cities and restrictions on private gatherings. The UK government has introduced a system of tiered restrictions, and millions of people in England and Wales are already under the maximum third tier. Ireland has effectively re-entered total lockdown, and private gatherings are restricted in Italy, Spain and other countries.
European transport fuels margins to North Sea Dated have subsequently come under pressure. Gasoline margins fell by $2.48/bl this week to $2.94/bl — they were $8.26/bl two weeks before that. Demand for gasoline fell by as much as 90pc in some regions during the first Covid-19 wave, although relatively lighter restrictions now mean that the current hit to demand is unlikely to be as severe.
Falling gasoline margins have pulled down naphtha crack spreads, given the latter’s use as a gasoline blendstock. Naphtha margins are down by $1.01/bl this week at 94¢/bl, after they hit a four-year high at the start of the month.
Middle distillate margins have also felt the squeeze. Diesel margins are down by $1.26/bl this week at $4.08/bl, the lowest since late September. Similarly to gasoline, the prospect of fresh travel restrictions is reducing demand at a time when stock levels remain exceptionally high after consecutive months of steady builds. Jet margins are down by 84¢/bl at $1.71/bl, which could continue to encourage refiners to blend as much jet as possible into the diesel pool. This will ensure diesel stock levels remain ample.
The downward pressure on transport fuel margins is capping buying interest in vacuum gasoil (VGO), a feedstock for secondary units that increase refineries’ road fuels yields. But VGO values are yet to come under substantial pressure because of supply tightness and the need to keep secondary units fed. Buoyant 0.5pc fuel oil crack spreads could be helping low-sulphur VGO to weather the storm, with firm demand for low-sulphur blending components from the marine fuel pool — 0.5pc fuel oil was at a $5.12/bl premium to Ice December Brent at close yesterday, which was $3.32/bl above Eurobob oxy gasoline crack spreads.
The latest downturn in fuels margins poses a fresh challenge for European refiners, many of which are already operating at a loss. With around 1.3mn b/d of capacity offline for maintenance, some may hold off on unit restarts until the pricing outlook improves and others may look to idle units unable to operate profitably. Around 700,000 b/d of crude processing is switched off for economic reasons, including some longer-term mothballing. Total, Spain’s Repsol, Finland’s Neste and Portugal’s Galp all announced third-quarter operating losses in their European refining businesses. Total, Neste and Sweden’s Preem all plan to convert some European refining capacity to renewables processing, as the demand outlook for the coming year leaves some of the continent’s refineries surplus to requirements.
