The plunge in profits from turning crude into fuels is overdone and refining margins will likely recover as demand for diesel picks up due to the introduction of new ship-fuel rules, according to Morgan Stanley.
The collapse in profits from producing high-sulphur fuel oil – banned under the International Maritime Organization rules unless ships are fitted with pollution-reducing scrubbers – was widely anticipated, the lender said in a December 9 note. However, weaker sour crude pricing and stronger profits from cleaner fuels such as diesel that were expected to offset this have yet to materialise, it said.
“We think this is a timing mismatch,” analysts including Amy Sergeant and Martijn Rats wrote in the note. “We think the real boost for distillate demand won’t come through until we enter 2020.” HSFO weakness should translate into wider sour crude differentials and prices for the fuel have also fallen to a level where it can compete in power generation, limiting further downside, Morgan Stanley said. The bank said it preferred complex refiners that can take advantage of wider sweet-sour crude spreads and stronger middle distillate cracks. The new ship-fuel standards, known as IMO 2020, take effect January 1.
Complex refining margins in Singapore have plunged from more than $10 a barrel in mid-September to as low as almost -$2 a barrel last month on a Dubai crude basis. They were -27 cents on Monday. Margins from processing Russian Urals in Northwest Europe plummeted to its lowest level since at least 2008 last month, while returns from making fuels from Iraqi Basrah Light in the US Gulf Coast slipped to an eight-year low in October.
from Gulf Times https://ift.tt/2t5ibwy
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