Oil Companies, Secondary European Refining - OPEC+ is not helping

Our European composite margin reached 5-year lows last week at ~-$2.1/bbl. Margins have been under pressure due to the recovery in crude prices, low levels of demand and limited capacity reductions beyond some temporary run cuts/closures.

08 Jun 2020

European Composite benchmark margin

Source: DataStream, UBS estimates

This line chart illustrates the European composite benchmark margin in the oil refining sector.

OPEC+ partners agree to extend production cut

OPEC+ partners agreed to a first phase (9.7Mbd in cuts) extension by a month to July - with the exception of Mexico (a relatively small contribution of 100kbd). It also called for compensation by recent overproducers (e,g, Iraq, Nigeria) through excess compliance in the next deal phases. Recent additional cuts of ~1.2Mbd from Saudi/UAE/Kuwait/Oman will not extend. The outcome is largely in line with expectations and negative in our view for refiners as it keeps more barrels off the market.

European refining margins at 5-year lows, likely to stay under pressure

We see the weekend's developments as likely to keep light-heavy crude differentials as tighter for longer. This should add to the pressure European refining margins are already under: our European composite margin reached near 5-year lows last week at ~$2.1/bbl. Margins have been under significant pressure because of the sharp recovery in crude prices, demand still well below normal levels and very limited capacity reductions beyond some temporary run cuts/closures. Current levels are not sustainable in our view and likely to lead to renewed refining run cuts but we see the addition of nearly 1mb/d of new capacity around mid-2020 as likely to keep margins weak over the rest of the year.

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