In the wake of Russia’s invasion of Ukraine, Europe’s oil refineries are experiencing a resurgence in demand, showcasing how geopolitical tensions can reshape the energy landscape.
The recent bid by energy trader Vitol to acquire a controlling stake in Saras, one of Europe’s largest oil refineries located in Sardinia, underscores the heightened competition for refining capacity in the region.
The recent drone strikes by Ukraine on refineries within Russia serve as a stark reminder of the vulnerability of global energy supplies to sudden disruptions. This incident contributed to a 2.7% surge in the price of Brent crude, underscoring the fragility of the oil market in times of geopolitical instability.
According to energy analysts, cited by the Financial Times, refiners positioned to weather these challenges stand to reap substantial profits. Elliot Radley, head of European refined product prices at Argus Media, notes that for companies with a higher risk appetite, there is arguably more money to be made than ever by refining crude in Europe.
Projections indicate a reduction in Europe’s crude distillation capacity by approximately 7% by 2026 compared to 2020 levels, driven by plant closures and sales by major players such as Shell and BP.
The tightening capacity has led to a significant increase in premiums for refined products. The premium for diesel over benchmark crude has soared to a global average of $29.77 per barrel this year, compared to $15.69 per barrel over the past decade. Similarly, the spread for gasoline has surged to around $18.09 per barrel, nearly three times the average from 2010 to 2019.
The backdrop for this shift is the long-term decline of Europe’s refineries, driven by major oil companies shuttering plants to align with net-zero emissions targets and contend with the rise of electric vehicles. However, the confluence of factors including the war in Ukraine and tensions in the Red Sea has breathed new life into these refining assets.
Elevated margins for refined oil products such as diesel and gasoline have emerged, presenting a lucrative opportunity for refiners amidst geopolitical uncertainties.
