Global crude slate to sweeten due to NGL and oil shale growth, but to get heavier and sourer for European refineries, say investment bank analysts.

The strength in global refining margins will not persist, despite recent rises in response to closures of simple OECD refineries and Petroplus’s bankruptcy, says a report from Barclays Capital.

In its latest Oil Products and Refining Outlook, the bank says global refining margins are likely to hover close to historical averages, in the absence of a significant loss of refining capacity. The report mantains there is sufficient current and scheduled refining capacity to meet demand growth.

“Even assuming that all of the announced closure of nameplate capacity in the OECD is removed from the market permanently…this is still a bumper year for capacity additions from Asia and the FSU [former Soviet Union]. Capacity additions get only worse beyond 2012, as the Middle East and Latin America are set to bring online large refineries.”

Barclays Capital expects total net refinery capacity additions of 2.487mbpd for 2012, followed by 2.784mpbd and 3.739mbpd in 2013 and 2014 respectively. BarCap also expects around 10.497mbpd of new net capacity to come onstream from 2015 and beyond. This compares to additions of 2.685mbpd and 1.68mbpd seen in 2010 and 2011.

However, the research note makes the case that “with oil majors increasingly moving away from the integrated model, the refining business is no longer shielded by the umbrella of upstream profitability and thus should incentivise a quicker timeline for closures of non-profitable refining capacity.”

Refineries “must adapt to a rapidly changing crude slate, which is getting lighter due to the growth of oil shales and NGLs. This comes at a time when global upgrading capacity and installation of coker units are at a record high and refineries around the world have invested heavily to process heavy-sour grades. This is likely to compress light-heavy differentials significantly over the coming years, in our view, rendering many large capital investments undertaken by refineries to upgrade rather futile.”

The research note cites a forecast from the IEA predicting that Opec NGLs will rise by 1.6mbpd by 2016 to 7.4mbpd, with US NGLs and oil shales growing by 0.6mbpd and 1mbpd over the same period, which will work to lighten the incremental barrel. This, says BarCap, will most affect the US and Middle East, while the European crude slate will get heavier and sourer “as more Urals and African crude is blended into the North Sea liquids, while a large number of refineries in northwest Europe are still configured to process the light sweet North Sea Crude. Worse still, Europe remains significantly short of distillates, a trend that is likely to worsen as the crude slate gets heavier and thus it becomes costlier to process the middle distillates.

“The long-coming upgrading cycle in the refining sector is finally here, curtailing fuel oil supplies. This is made worse by the introduction of the 60-66 tax in the world’s largest producer of fuel oil, Russia, which favours the production of light ends. Tight supplies are coming at a time when Japanese needs for fuel oil for power generation are soaring, alongside incredible strength in bunker demand. We thus see value in positioning for Q4 fuel oil spreads or cracks,” BarCap says.

Some support for fuel oil is coming from power generation in Japan, with the authors of the report noting that over the October 2011–March 2012 period, Japan’s crude and fuel oil demand is estimated at 0.41mbpd and a further two nuclear power plants are being shut, on a potentially non-permanent basis. BarCap also expects support from the 9% and 6% expected growth in the global dry bulk carrier and tanker fleets for this year, coupled with the growing use of cokers. The analysts note that 0.2mbpd of fuel oil output cuts took place in 2011 in the US, with a further 0.11mbpd expected for this year, “with further reductions on average of 0.75mbpd expected each from Spanish and Indian refineries”.

The global oil product market will remain short of distillates in 2012, due to well-supported Chinese demand, growing penetration of diesel vehicles in the Indian passenger car fleet and healthy demand in the Middle East and Latin America. There will also be support from the US and Europe, due to low inventories.