European refineries face margin collapse as crude and freight costs surge

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European refineries margin collapse

Highlights

European refinery margins plunged from $54 per barrel in early September to minus $11 on October 5, now at $3, as crude and freight costs outpace product prices.
Dated Brent rose more than 13% in the past month and tanker premiums surged, driving refinery gate crude costs to record highs and pushing gasoline and naphtha crack spreads negative.
IEA forecasts global refinery runs falling to 81.3 million barrels per day this month, with high shipping costs fragmenting markets and squeezing European and Asian profitability despite U.S. refining gains.

Cost squeeze hits refining economics

As reported by Financial Times, refining margins in north-west Europe have fallen sharply as physical crude prices and supertanker hire costs rise faster than prices for products such as gasoline and naphtha. LSEG data show margins dropped from $54 a barrel at the start of September to as low as minus $11 a barrel on October 5, and they currently stand at $3 a barrel.

The International Energy Agency says crippling crude acquisition and freight costs have crushed European and Asian margins in recent weeks. The decline in crack spreads comes even as global diesel markets tighten, with analysts saying a diesel release deal announced on Friday by U.S. President Donald Trump and Russia is unlikely to have much effect.

Analysts say some European refineries could soon begin assessing whether to reduce operations if profitability weakens further. Benedict George, head of products pricing at Argus, says margins are now very thin and refiners remain uncertain about their next steps over the coming weeks.

Refiners have limited flexibility over how much of each product they can yield from a barrel of crude, even though diesel and jet fuel prices have climbed this year. Crack spreads for lower-margin products such as naphtha and high-sulphur fuel oil have moved deeper into negative territory, while gasoline crack spreads turned negative at the end of last month.

Regional market strains deepen fuel price pressures

Concerns over Gulf oil supplies, including a pause in flows through Saudi Arabia's East-West pipeline, pushed refiners to pay steep premiums to benchmark prices last month for future deliveries. At the same time, Dated Brent, the physical benchmark for oil delivered in roughly 10 to 30 days, has risen more than 13% over the past month, far outpacing the 1.2% gain in front-month futures contracts.

The combination of higher benchmark prices and large premiums has lifted crude costs at refinery gates to record highs. Conditions differ sharply from those in the U.S., where refiners can rely on domestic crude and avoid the jump in shipping costs tied to tanker shortages during the war, leaving them positioned for a more than fourfold increase in profits.

Even so, the IEA says stronger incentives to run more crude in the U.S. do not offset weaker economics elsewhere, and global refinery operations are set to reach a seasonal low of 81.3 million barrels a day this month. High tanker rates are also fragmenting oil product markets, making it harder to move fuel from lower-priced regions to higher-priced ones and adding to price pressure for consumers in Europe and Asia.

Our earlier report on tight diesel markets highlighted the International Energy Agency’s warning that global supply could stay constrained into the second half of 2027 as inventories remain thin heading into winter demand. It also noted that exports have fallen sharply and that high freight costs risk pushing delivered diesel prices even higher across key importing regions.

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