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* Refinery margins hit as Middle East unrest raises crudeprices
* Shale boom turns U.S. into big diesel exporter
* European margins for gasoline, diesel fall simultaneously
* Refiners reducing stocks
By Lin Noueihed, Ron Bousso and Claire Milhench
LONDON, Nov 20 (Reuters) - European refiners are battling tosalvage what is poised to be one of their worst years on record,slashing production, running down crude oil stocks and idlingloss-making plants as a new raft of closures loom.
Middle East unrest means the price of crude oil, whichrefiners convert into motor and heating fuel, has remainedstubbornly high this year, squeezing profit margins amid weakdemand as European economies struggle to maintain growth.
At the same time, larger, state-of-the-art refiners in theUnited States, Middle East and Asia also enjoy cheaperfeedstock, giving them a head start in the race for markets.
The flurry of challenges is likely to prompt more closures,with top traders and analysts saying they expect up to twomillion barrels per day of European refining capacity or around15 percent to disappear by 2020.
"The outlook is grim and we don't see 2014 getting muchbetter," said Jonathan Leitch, senior oil analyst at resourcesindustry consultancy Wood Mackenzie. "You cannot afford to keepoperating refineries at these levels... We are going to have tosee more closures of European refineries in 2014."
Sixteen European refineries, accounting for 1.7 millionbarrels per day (bpd) of refining capacity, have been mothballedsince 2008, according to the International Energy Agency (IEA).Europe's capacity stood at around 16 million bpd in 2012.
First to fall in the next round of closures could be ageingand unsophisticated plants in the Mediterranean that need heavyinvestment and struggle to adapt to changing market conditions.
Cepsa's 88,000 bpd refinery in Tenerife has been shut forfour months as it could not generate profit.
The Spanish firm said last week it would reopen the plantfor a few weeks but only to burn remaining crude stocks as itcosts money to store them. Past that, it would remain shut untilmargins improve
Hellenic Petroleum's Thessaloniki refinery innorthern Greece is also idle due to economic conditions, asource close to the matter said last week.
Traders say that unless margins improve, those two plantscould face the same fate as MOL Group's 52,000 bpdMantua refinery in Italy. The Hungarian owner said last month itwould convert the plant into storage.
Even for Italy's Saras, which runs the relativelysophisticated and efficient 300,000 bpd Sarroch refinery inSardinia, the second half of 2013 was challenging.
Though Sarroch's margins have significantly outperformed thebenchmark average for Mediterranean refiners, it cut crudeprocessing by about 10 percent in the third quarter and expectsto keep a similar throughput until the end of the year.
"We ran at about 90 percent instead of 100 and this is dueto the very tough conditions," Massimo Vacca, head of investorrelations and financial communications at Saras, told Reuters.
"If we had a negative refining margin like the averageEuropean plant, we would have temporarily halted production.However, we expect our refinery to return to full operatingcapacity in 2014."
REDUCING STOCK AS MARGINS SINK
European crude processing runs for September fell to theirlowest level since April 1991 and October figures are set to beeven lower, prompting the IEA to slash its forecast for fourthquarter global refinery crude processing runs by 555,000 bpd.
At the same time, refining margins in northwest Europe andthe Mediterranean sank into negative territory in August andSeptember. They only marginally improved in October, despiteseasonal maintenance that has curbed output.
"I don't think we've ever seen margins run to such levelsduring seasonal maintenance," said Toril Bosoni, senior oilanalyst at the IEA, the West's energy watchdog.
"Normally when European and Russian refineries are inmaintenance you see margins rise, but the U.S. imports offsetall that and I don't see that changing."
Gross refining margins for Brent crude oil are expected toaverage $1.10 a barrel for 2013, compared with $4.10 a barrel in2012, according to Wood Mackenzie.
And Mediterranean refiners that partly rely on Russian crudehave again fared worse as Urals prices have been high due to lowIraqi supplies and sanctions on Iranian oil.
A lack of forward buying in the North Sea crude oil marketover the last six weeks has added to growing evidence thatrefiners are quietly delaying their return from maintenance.
November cargoes have been slow to clear, raisingexpectations that refiners will simply try to run down crudestocks for the end of the year to improve their balance sheets.
"Companies would rather have cash than inventory... Cashlooks more attractive for end-of-year results," a trader said.
Refiners are also struggling to clear surpluses of refinedoil products as consumer demand in Europe remains week.
Industry monitor Euroilstock showed a build in crude andproduct stocks, even as their crude intake fell.
EUROPE'S GASOLINE GLUT
The challenges facing European refining go beyond marketvagaries: they are also structural.
Europe's refineries, many of which were built in the 1960sand 1970s, were originally geared to meet the region's demandfor gasoline. As motorists have shifted to more efficient dieselin recent decades, Europe has been left with a surplus ofgasoline and shortage of diesel made up by imports.
Excess European gasoline traditionally found an outlet inthe United States but demand there has shrunk since the 2008financial crisis and with moves towards more efficient cars.
At the same time, U.S. refiners have reaped the benefits ofthe shale boom that has provided abundant and cheap feedstocks.
U.S Gulf Coast refineries started exporting record volumesof diesel to Europe in September, covering any shortages thatwould have occurred due to lower regional output. That meansrefinery profit margins, known as crack spreads, have declined for both gasoline and middle distillates like diesel.
"When gasoline cracks were weak in the past you had middledistillates cracks offsetting that. But we haven't seen thatthis time round because of the large inflow of gasoil and dieselfrom the United States, Russia and Asia," Leitch said.
Faced with a glut, European refiners have in recent weeksbeen forced to slash production at their gasoline units.
One of the main reasons more companies have not alreadyshuttered unprofitable plants, said Saras' Vacca, are strictEuropean cleanup rules that make the process cumbersome.
European refiners have lobbied the European Union tostandardise rules and make it easier for loss-making plants toclose down while creating incentives for refiners that want toinvest to improve competitiveness.
The EU is conducting a "fitness check" of the Europeanrefining sector that is due to be completed in 2014.
"We're moderately optimistic on the outcome of this process,because the EU recognised the strategic role of its refiningindustry in order to guarantee energy security," Vacca said."Europe cannot afford to let this industry shut down and shiftto other continents."
