Oil’s not well as future looks black for refineries

By Investments
Oil’s not well as future looks black for refineries

The future looks black for oil producers as prices drop – but every cloud has a silver lining and refiners are enjoying a cracking good time.

The margins have changed in recent months as pump prices have dropped but are still high and prices per barrel of crude have fallen back.

Swiss bank UBS reckons refineries are revelling in windfall profits that are welcome but short-lived.

The oil business model was built on ferrying crude from oil producing nations to massive refineries in the US and Europe, where their product would be turned in to petrol, kerosene and diesel, among other things.

Gas guzzling cars were all the rage until the West decided to break the dominance of Middle East oil powers by looking elsewhere for the black gold.

Now, as the West eases demand for oil, but new and more efficient refineries in the Middle East, China and India are changing the model as crude is refined nearer the point of production and shipped as an end-product.

Competition and overcapacity in refineries is wreaking havoc in the market and forcing speculators to rethink how they look at oil as a commodity and refining companies as an investment.

Swiss refiner Petroplus has already tumbled off the precipice. A partnership led by Shell bought out the firm’s Canvey Island refinery in Essex – but is promptly sacking many staff and stripping the operation back to a storage facility.

In the US, Sunoco Philadelphia, the largest refinery in the north-east has just won a new lease of life after getting ready to close for good within a month.

The issue for refineries is many are configured to convert crude in to petrol, when the modern need is to refine heavier grades of oil.

As motorists shun petrol because of cost, demand has fallen away from refineries and cheaper options have become available – from shifting pre-refined fuel by tanker to cheaper refineries in places like Mexico opening the tap on pipeline feeding straight in to the States to undercut internal prices.

The tap seems to be turning off for the West’s monster, monolith refineries, and soon their only fuel will be for speculation over their futures.

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