Europe’s Oil Refiners Enjoy One Last Hurrah

(Bloomberg) -- Europe’s refining industry faces cuts at the start of the next decade when the expansion in capacity in Asia starts to outweigh the positive impact next year from the IMO rules on shipping fuels, according to IHS Markit.

Next year will probably be the “last good year for European refining,” according to Spencer Welch, oil markets and downstream director at IHS Markit. “Refining is going to become cut-throat again in Europe,” he said in an interview in London.

Europe suffered a previous round of capacity cuts at the beginning of the decade when weak margins forced the closure of refineries including Coryton in the U.K. and Wilhelmshaven in Germany. The industry will start to consider reductions in capacity from 2022 or 2023, Welch said, partly due to falling demand in the region as well as ample supply from the Middle East.

Regulations on shipping fuel being brought in by the International Maritime Organization next year will offer a reprieve for many refiners, with the majority benefiting from the rules, according to Welch, who previously worked for BP Plc. The rules, which cap sulfur content in shipping fuels at 0.5% from the start of January, are expected to boost demand for so-called distillate fuels, replacing dirtier fuel oil. Most refiners produce more distillate than fuel oil, Welch noted.

Earlier this month, OPEC highlighted the risk in refining as new capacity comes online in the Middle East and the Asia-Pacific region, such as the Pengerang complex which is currently starting up in Malaysia. That increase in capacity will contribute to a return to the “really painful years of 2010-2014” for European operators, Welch said.

Coastal refineries will probably be more exposed to weakening margins than inland plants, because they face direct competition from other suppliers in contrast to landlocked facilities which have more of a captive market.

©2019 Bloomberg L.P.

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