Shell's Pernis refinery fire buoys oil product prices

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Shell's Pernis refinery fire buoys oil product prices

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By Ahmad Ghaddar and Libby George LONDON (Reuters) – A shutdown at Europe’s largest oil refinery is boosting already-strong profit margins for petroleum products and further tightening a market that had been showing signs of rebalancing for weeks. Royal Dutch Shell <RDSa.L> began shutting down most of its units at the 404,000 barrels per day Pernis refinery in Rotterdam following a late-evening fire on July 29 in its power supply system. The length of the shutdown remains unknown, but the company was still in the process of switching off some units at the plant on Monday, suggesting a restart would not be immediate. The shutdown drove up the benchmark diesel refining margin in northwest Europe <LGO-1=R>, the profit that refiners can make from refining crude into diesel, to a session high of $14.60 a barrel on Monday, its highest level since November 12, 2015. The benchmark European prompt Low Sulphur Gasoil futures contract <LGOc1> traded at a premium to the September contract of as much as $10 a tonne earlier in the day, before coming off to $1.75 a tonne at 1230 GMT. That compared with a discount of 25 cents on Friday. When a current-month contract trades at a premium to the following month, a structure known as backwardation, it indicates a strong market for prompt supplies. The rise in European prices opened up the diesel arbitrage from Asia and widened that from the U.S. Gulf Coast, according to traders. Asian diesel refining margins rose to a near two-year high on the news of the outage, according to traders. <GOSGCKMc1> “The strength in the structure in diesel and the crack was there already, it’s not just Pernis,” said Olivier Jakob, strategist at Swiss-based Petromatrix. Margins in Europe, particularly for diesel, had been climbing for weeks on the back of solid exports to Latin America, West Africa and even Asia, and a limited inflow from other regions. Traders said concern over how long the refinery would be down was leading to an even bigger rally and one that could extend to support refinery margins in Asia and the United States. “A power failure like that is often quite serious,” one trader said. “They will have to wait before doing a damage inspection on the refinery, never mind fixing the power supply issues.” Gasoline barge prices in Europe on Monday morning were trading at $550 a tonne on a loading basis in the Amsterdam-Rotterdam-Antwerp region, up from a range of $523-$532 a tonne on Friday. As a result the gasoline refining margin in northwest Europe was up by around 12.2 percent at $13.43 a barrel, according to Reuters calculations. U.S. gasoline margins also traded at a peak of $20.33 on Monday, nearly 5 percent above the Friday close. <Rbc1-CLc1>. “The duration of the closure will determine the strength but in the medium term, other regions will step in to fill Europe’s missing production,” said Ehsan Ul-Haq, director of crude oil and refined products at Resource Economist Ltd. However, Ul-Haq warned that the outage was likely to weigh on crude oil prices, even as other refineries run at full steam on the strong margins. “The closure of Pernis does not bode well for the European crude oil market,” he said, referring to the refinery’s crude processing capacity.

(Additional reporting by Ron Bousso, Jarrett Renshaw, and Jessica Jaganathan; Editing by Louise Heavens, Greg Mahlich)
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