The oil price rally above $80 a barrel is pinching refining margins and will prompt another round of run cuts in Europe and the United States, where demand for products is lacklustre coming out of the peak season.

Refiners in the Atlantic basin cranked up run rates through the summer to profit from a brief margin flurry on the back of relatively low oil prices, improving diesel demand and permanent capacity shut downs.

Refining cuts loom as oil cost hammers margins

That proved short-lived with demand not yet strong enough to justify US refiners running at more than 90 percent of capacity, a level last seen before recession hit in summer 2007.

"With the erosion of margins on the strength of crude prices, you are likely to see discretionary runs cuts implemented ahead of planned maintenance in the autumn," BNP

Paribas head of commodity strategy Harry Tchilinguirian said.

US crude prices jumped to a three-month high above $80 a barrel last week and have since traded between $80-$85.

Even discounting the usual plant maintenance in the autumn as demand tails off after the holiday season, refiners will be forced to cut back even more to try and soak up the excess stockpiles that have mounted over the summer, analysts said.

Global refining margins have dipped by around $1 so far in the third quarter to $4.58 a barrel from April-June, according to data from BP, with the steepest falls occurring in the US Gulf Coast and in northwest Europe.

In Europe, margins have more than halved from January-June levels to just above $1 a barrel, according to JBC Energy.

Analysts at Bank of America-Merrill Lynch estimate European refiners have already reduced run rates to around 78 percent.

Petroplus, Europe's largest independent refiner, will limit production to around 81 percent in the third quarter despite the absence of planned maintenance work, Reuters calculations show.

DISAPPOINTING GASOLINE SEASON

One factor behind the weakness is the disappointing gasoline season. Many had expected gasoline demand to roar back as western economies emerged from the recession, with consumption peaking in the summer.

But high unemployment and rising prices have seen the season end with a whimper and not the bang many had been banking on.

Stocks of the motor fuel in the United States generally fall during the summer as Americans take to the roads, but they have been rising for the past six weeks, according to data from the Energy Information Administration (EIA).

"There's been a big increase in runs in recent weeks and now we can see that the result is an increase in product stocks and no real demand for them. It's not very good for margins," said oil analyst Christophe Barret at Credit Agricole CIB.

Gasoline refining margins in the United States are at an unseasonable $3 discount to gas oil in Europe.

And if the forecast lively hurricane season fails to materialise, the crash in margins could be particularly severe.

In Europe, gasoline margins, once the darling of the refining complex during the summer due to the export demand to the United States, have fallen in early August to a 6-month low of less than $4 a barrel.

Gasoline stocks in independent storage at the Amsterdam-Rotterdam-Antwerp hub stand about 20 percent higher than they were last August.

REALIGNMENT

The problem, some analysts argue, is the August jump in crude prices do not reflect a significant rise in demand in developed markets, pointing instead to increased investor interest in commodities.

Oil product prices, which tend to better reflect real demand in developed western markets, have not been able to keep pace with the crude rally.

"This (the August rally) is probably short-term...The current moves up and down are related to the sentiment of investors in the market about the future prospects for the global economy and not really the underlying demand for physical oil," said Angelos Damaskos, manager of Junior Oils Trust.

For those who don't believe investment flows can move the price of oil, there might still be reason for caution when betting on the recent rise in oil prices.

Traders and analysts both argue the expected drop in refining rates will swell crude oil stocks and drag prices back below $80 a barrel. That will ultimately help margins recover.

"The crude price will come under pressure from run cuts," said consultant Alexander Poegl at JBC Energy.

"You have a very strong crude market at the moment... but products have been trading differently as the demand is really not there. We really need to see run cuts and we expect they are already under way."