Doubling Your Money Gets Harder as European Refinery Boom Fades

  • Independent European refiners have returned 28% this year
  • Wood Mackenzie sees refinery margins falling about 50% in 2016

Carlo De Vanna more than doubled his money in an 18-month bet on Italian refiner Saras SpA. Now the Milan-based money manager has sold his stake, predicting the surge in European margins is coming to an end.

“We’ve reduced some long bets we had in the first part of the year, such as the refiners,” said De Vanna, who helps manage 200 million euros ($227 million) at Ersel Asset Management SGR. A slump in the cost of crude boosted profits of companies such as Saras, but now “we’re expecting a rebound in oil prices in the short term” to as much as $55 a barrel, he said.

Europe’s refiners have enjoyed a bonanza this year as low crude prices lifted margins to a 20-year high. Saras, Neste Oyj and five other independents posted returns of 28 percent since December, beating the performance of every industry group on the benchmark Stoxx Europe 600 Index. Now they are losing momentum and the sweet spot for investors may have passed, according to analysts including Bank of America Corp.

The turning point will come this quarter, with refining margins in northwest Europe set to fall by about two-thirds from a peak of $8.85 a barrel in the preceding three months, according to Wood Mackenzie Ltd. For 2016, margins will average 47 percent lower than this year as diesel stocks build and as refining capacity increases in the Middle East, the energy consultant said.

“We don’t think that the margin levels that we’re going to achieve this year will be repeated next year,” Michael Dei-Michei, an energy-market analyst at Vienna-based JBC Energy GmbH, said by phone. Margins will probably drop to $4.50 a barrel in 2016 from $6.50 forecast for this year, he said.

Exceptional Margins

Even with a decline, they will still be 85 percent higher than they were in 2014 and almost triple the level in 2013, Wood Mackenzie figures show. Margins, also known as crack spreads, are the difference between the price of the oil products a refinery sells and the cost of the crude feedstock it buys.

“This year the refining margin is exceptionally high,” said Matti Lievonen, chief executive officer at Finland’s Neste, whose $10.83 a barrel margin in the second quarter was 30 percent higher than a year earlier. “Next year it should be healthy, but not of the same magnitude,” he said in an interview.

Saras expects low oil prices to underpin the industry for some time, after its margins soared 21-fold to $10.50 a barrel in the second quarter from a year earlier.

“What has really changed and what gave a boost to our share price is the low oil prices, which we think will persist for a while,” Marco Schiavetti, director of supply and trading at Saras, said by phone. “The market is clearly oversupplied, there are plenty of crudes around and we are benefiting.”

Crude Rebound

While that chimes with Goldman Sachs Group Inc.’s forecast last month that a glut of crude may keep oil prices low for the next 15 years, Pacific Investment Management Co. said last week that the worst of the collapse in commodity prices is probably over.

Benchmark Brent crude has rebounded by about 17 percent from a six-year low in August, which will raise input costs for the refiners, according to Philipp Chladek, an analyst at Bloomberg Intelligence in London. That will push margins down, pressuring refiners’ profitability, he said.

Refining margins in Europe will decline to $5 to $10 a barrel in the second quarter of 2016 from $10 a year earlier, according to 49 percent of respondents in a Bloomberg Intelligence survey. Another 23 percent expect the margins to slump below $5 a barrel.

Increased Competition

After advancing 47 percent since December to a peak on Aug. 11 , shares of the seven independent refiners have declined by a weighted average of about 13 percent, according to data compiled by Bloomberg.

Recovering crude prices may return attention in Europe to the underlying surplus of refinery products, which had been masked by the slump. Some 2 million barrels a day of refining capacity has been taken offline since 2008 amid the oversupply, according to Steve Sawyer, a London-based consultant at FGE. 

Brent climbed 0.3 percent to $50.02 a barrel on the London-based ICE Futures Europe exchange at 4:25 p.m. local time.

And while another 1.5 million barrels a day is scheduled to be shuttered from next year, the problem will remain, said Philippe Sauquet, head of refining and chemicals at Total SA, the region’s top refiner.

“This won’t be enough for the next five years” amid slowing global demand, Sauquet said at a conference in London Oct. 7.

European refiners will also face competition from the Middle East, said Davide Albani, a money manager at Sella Gestioni Sgr Spa in Milan, where he helps oversee 100 million euros in assets, including Saras shares. The region will add 600,000 barrels a day of capacity between this year and next, the International Energy Agency estimates.

“We believe that a great part of the outperformance may be over,” said Albani, referring to European refiners. “But it could still perform nicely at least for the next year, mainly due to the low oil-price environment.”

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