Slump Puts Russia's Refiners On Brink

Russia’s refineries are on the cusp of an existential crisis. The industry is witnessing an acute slump in margins this month and can barely eke out a gain. Middle distillates remain strong and are expected to firm in the lead-up to the EU ban on Russian oil products on Feb. 5, 2023. Beyond that, the outlook is grim, and Russia’s refineries, which export about half their output, may have to slash throughput by 15%. Closures are unlikely given the sensitive social ramifications, but smaller facilities without conversion capacity, as well as teapots, could suffer a quiet death. For every three barrels of crude processed, a typical Russian refinery produces two barrels of light products and one of heavier fuels. The latter has been unprofitable for some time, but this was exacerbated by the US embargo earlier this year. The crack spread on a barrel of heavy fuel oil for a refinery near Moscow sunk to minus $43 per barrel this week. Normally, refiners could live with that, but this month gasoline and naphtha returns have also deteriorated. Domestic gasoline sales are subsidized, but the state cut this subsidy so the crack on 92-octane gasoline, the most widely used, has been a negative $1.5/bbl over the past week. At the end of July, it was a positive $40. Meanwhile, naphtha, which is mainly exported, has a negative crack of about $20/bbl since European buyers, who used it as petchems feed, are demanding a steep discount.