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10/27/15

The Energy Business: End Of The European Refining Boom Or Just A Pause? - by MichaelMcDonald

I t’s been a painful year for energy investors with most oil-related stocks down significantly. One of the few exceptions to this rule of thumb is the refining sector as many refining companies have seen substantial benefits from the fall in the price of oil.

As crude prices have collapsed, gasoline and other derivative product prices have been coming down much more slowly. As a result, spread margins have widened considerably and refiners have seen profits boom. Companies like Valero and other big name refiners have seen their stock prices leap higher as the glut of crude has led many oil producers to rush to sell their production.

What the markets gives, the markets take away though, and as oil prices have rebounded a bit over the last few weeks, many analysts now see refining margins shrinking back closer to pre-collapse levels.

For European refiners in particular this may be a major problem going forward. U.S. refiners are still benefiting from the export ban on most U.S. produced crude which in turn distorts the price for U.S. crude, holding it down and inflating refiner margins. European refiners have no similar advantage.

European investment managers appear to be getting nervous and some are taking profits and reducing their bets on the refinery sector. European refiners Saras S.p.A, Neste Oyj, Hellenic Petroleum, and other independent refiners have posted returns averaging 28 percent year-to-date, surpassing all other groups on the Stoxx Europe 600 Index.

But margins appear set to eventually shrink by around 65 percent from $8.85 per barrel to around $3.10 a barrel according to Wood Mackenzie Ltd. The firm is looking for refiners to return to historical norms, and while the timing on that return may be up in the air, the stocks are unlikely to keep moving higher in the medium term, Wood Mackenzie analysts say. The firm expects refinery margins to shrink by 50 percent in 2016 vs. 2015.

Read more:The End Of The European Refining Boom Or Just A Pause? | OilPrice.com

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