Refinery margins plunge to a minimum. Fears of production cuts grow in Europe

The profitability of European refineries has fallen sharply in recent weeks due to rising oil prices and the cost of transporting it. Refineries could therefore move to cut production at a time when Europe is grappling with rising fuel prices, the Financial Times (FT) reports today on its website. The Czech government is now preparing to introduce a windfall tax on refineries, citing an increase in their margins.

The conflict in the Middle East is behind the rise in oil prices and transport costs. Citing data from financial company LSEG, the newspaper said refinery margins in northwestern Europe had fallen from $54 per barrel at the beginning of September to just $3 per barrel now. Early last week, they even dropped as low as minus $11 per barrel.

The International Energy Agency (IEA) also pointed today to falling refinery margins as a result of high costs for buying and transporting oil. Some European refineries could soon begin considering production cuts, the Financial Times reports.

“Any further deterioration in profitability could lead to economically driven production cuts at less profitable refineries in Europe and Asia, heightening market tensions ahead of the end of the year,” the newspaper quotes from an IEA report.

Refineries produce a range of products from crude oil, including petrol, diesel and asphalt binder. For some products, selling prices have not risen enough to offset higher costs, the Financial Times notes.

“Margins are really very low now,” said Benedict George, an analyst at Argus.

He added that refineries “are not sure what they will do in the coming weeks”. According to George, refineries are not yet cutting production, but could do so if their margins remain low.

The Czech government’s plan to introduce a windfall tax on refineries received preliminary approval from the Chamber of Deputies on Wednesday. The tax will apply for this year and next. It will affect only large corporations and is likely to apply to just two companies in the Czech Republic: the refineries in Kralupy nad Vltavou and Litvínov. It will be levied on margins above the 2025 level. According to the Finance Ministry, the tax is expected to bring about 5.5 billion crowns into the state budget this year alone.