Oil Products' operating environment
The most important external factors influencing the financial performance of Neste Oil’s Oil Products reporting segment are the differential between product and crude prices, the differential between Brent crude from the North Sea and heavy Russian Export Blend (REB), and the USD/EUR exchange rate. Read more about Neste Oil's Oil Products reporting segment and refining margin.
Global uncertainty resulted in market turbulence
Political and economic uncertainty both impacted the oil market during 2011. Positive economic expectations in the early part of the year resulted in a rise in commodity prices, and saw crude reach a high of USD 125/bbl. Although no extreme peaks in crude oil prices comparable to those seen in 2008 were experienced during 2011, prices remained at historically higher levels in terms of annual averages. Political unrest in Libya also fed through into higher crude prices. In June, the International Energy Agency (IEA) released crude from emergency oil reserves to offset the shortfall in supplies resulting from the crisis in Libya, but the 60 million barrels released only had a short-lived impact in reducing prices.
The price differential between North Sea Brent and heavy Russian Export Blend widened throughout the spring on the back of the rise in crude prices. The differential decreased and became negative in the fall following the emergence of equilibrium in crude and petroleum product demand. In addition, a slow-down in economic growth and economic uncertainty had a negative impact on refining margins.
Natural catastrophes impacted inventory levels
Oil inventory levels fell throughout the year, both in Europe and worldwide. Demand for petroleum products fell back. There were temporary shortages of some crude oil grades during the year, which served to keep prices high, product margins low, and capacity utilization at European refineries in particular relatively low (<80%).
Growth in gasoline demand was concentrated in developing countries. In addition to economic challenges, the gasoline market was also impacted by refineries’ normal round of maintenance outages in the spring and fall and seasonal swings in demand. The impact of the driving season on gasoline demand was weaker than expected.
The diesel market was stronger than in 2010, and industrial demand in particular was strong. The tsunami in Japan affected demand worldwide, cutting nuclear capacity and increasing consumption of both natural gas and diesel. Diesel consumption was also affected by reconstruction in the wake of the tsunami and electricity shortages in China caused by the drought there, which saw diesel and heavy fuel oil used to generate electricity rather than hydropower.
Demand for Group III base oil remained strong and a tight supply situation kept prices high. Demand is expected to remain strong, as the shift from Group I and II base oil to higher-quality grades is likely to continue.
Russia investing in modernizing its refineries
A major reform of crude export taxes came into force in Russia at the end of 2011 aimed at securing investments in the country’s oil fields and modernizing Russia’s refineries. This is expected to increase exports of crude and reduce heavy product exports to Europe. A second crude oil pipeline to the export terminal at Ust-Lugan on the Baltic south of St. Petersburg was completed and Russia intends beginning crude exports from this new terminal in the near future.