Europe's refiners are likely to raise production in July because gains in product premiums have recently outpaced crude prices, traders said Thursday.
This could mark the end of a period of limited production in Europe that has lasted since the middle of April, when the return of many refineries from scheduled maintenance dragged down refined product prices.
Margins have remained low since April, but have recently edged up due to higher prices for diesel, gasoil and gasoline, especially in the Mediterranean region which has borne the brunt of run cuts, said traders.
Cracks are looking even more bullish in the forward markets for swaps, and traders said this would be the signal for many refiners to increase production starting from late June or July, depending on circumstances.
Refiners usually plan their production several weeks in advance because crude cargoes can take time to reach their final destination and they need to smooth out the complex logistics of refining and distribution.
"Everyone is discussing the higher US and Russian diesel production, but what's grabbing fewer headlines and is more significant is that European refiners will increase runs in July," said one UK-based products trader.
"The first sign is usually in the crude markets and they've been buying a lot...refining margins are much better," he added.
Traders said refineries situated in the Mediterranean basin -- which had been the first to decide production cuts in April -- were now reaping the benefits of stronger product prices and stable crude premiums.
The cash premiums for diesel, gasoil and gasoline, which together make up the bulk of refiners' profits, have all increased in recent weeks, sometimes above prices in northern Europe, where demand is usually more dynamic.
The value of a FOB Mediterranean gasoline cargo versus physical crude benchmark Dated Brent has risen from $6.21/barrel May 5 to be assessed at $14.40/b Wednesday, Platts data showed.
For a FOB Mediterranean diesel cargo it was $15.41/b Wednesday, up from $12.58/b in early May, while for 0.1% gasoil it was $12.86/b, up from $9.76/b in early May, the same Platts data showed.
Despite this, however, traders said refiners would remain cautious about increasing production because higher supplies could quickly kill the margins at a time of ever-lower consumption from end-users in Europe. They are more likely to increase runs in stages, they said.
Refiners in the East Mediterranean, where diesel prices have been particularly high recently, are likely to start first, followed by others in the Mediterranean and in Northwest Europe.
"There will be more production towards the end of June or the start of July, but it will take time," said one.
"You first have to order crude and you can't throw yourself in the market. The refinery's production then needs to be raised and it takes more than a few hours." A refined products trader in Italy said Thursday his company was not yet considering increasing runs.
In the crude markets, cash premiums in the Mediterranan and the North Sea have generally remained low with ample supplies everywhere, but the situation could change quickly if more refiners start to up runs.
The medium-term outlook for many refined product markets remains challenging with growing exports from the US, Russia, the Middle East and Asia, and falls in consumption in Europe, traders said.
