European oil refiners will probably be forced to cut production of gasoline and diesel as they seek to find alternatives to Russian feedstocks.
Shell Plc, which operates Europe’s biggest oil refinery, said this week that operating rates at some of its plants will be reduced, while finding other crude supplies could take weeks. That would coincide with an already tight market for fuels like diesel, as well as soaring prices at the pump.
“We can definitely expect run cuts at many European refineries,” said Jonathan Leitch, an oil analyst at Turner, Mason & Co. “European refiners are competing to secure scant supplies of alternative grades” with the situation exacerbated by longer delivery times.
Russia’s invasion of Ukraine — and subsequent international sanctions — have reshuffled global trade flows as companies seek to avoid Russian crude. Oil companies are reorganizing supplies for their processing plants, potentially transporting cargoes into Europe over greater distances and thus supporting already elevated freight rates.
The loss of crude supply from Russia is just part of the problem for Europe’s refiners. Companies including Greece’s Hellenic Petroleum buy so-called secondary feedstocks such as fuel oil and vacuum gasoil from Russia. They’re by-products of processing crude but can only be made into fuels like gasoline and diesel in the more modern refineries that Russia tends to lack.
According to Portugal’s Galp Energia SGPS SA, Russia accounts for half of the world’s supply of vacuum gasoil. The feedstock is often made into diesel.
Run cuts at secondary units are already occurring due to the avoidance of Russian VGO, George Dix, an analyst at researcher Energy Aspects Ltd., said by email. Wider reductions could be made within a few weeks if European refiners can’t source alternatives to Russian crude, he added.
Timing of curbs
Finding alternatives could be more critical for refineries that are reliant on seaborne supply. Refineries in eastern Europe, as well as two plants in Germany, receive deliveries of Russia’s Urals grade by pipeline.
“We expect the impact on crude runs will be concentrated on countries who previously took large quantities of waterborne Urals as baseload,” Dix said.
The timing of processing curbs could depend partly on refinery maintenance, which typically reduces fuels output at this time of year. Shell, BP Plc and Repsol SA have all idled production capacity for routine work, and some of that will be due to return to operations as inventories of crude and other feedstocks are starting to run low.
In the short term, there will probably be enough crude released from storage to keep refineries running at maximum rates, according to Steve Sawyer, director of refining at Facts Global Energy.
“Although natural gas prices are soaring, I think the market is so desperate for diesel, product cracks are also very high and supporting maximum rates,” he said.
Source: Bloomberg
Tags: Crude Oil, European Fuel, Fossil Fuels, Russia, Shell, Ukraine War
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