Shell PLC (LSE:SHEL, NYSE:SHEL) is one of the best placed among European energy groups as refining margins come under pressure, according to JPMorgan.
The bank said refining profitability in Europe has fallen sharply after peaking in March, with margins now returning towards mid-cycle levels. Lower-quality “simple” refining margins have turned negative.
Rising input costs, including higher crude prices and increased utility and freight expenses, have squeezed margins.
"That European trends are now undershooting other regions suggests increasing challenges to passing higher costs onto consumers," analysts said, adding that a watching brief is necessary due to the recent erratic movements of prices and margins amidst dislocated wider energy markets.
The bank warned that if tensions between higher oil prices and weakening demand become more entrenched, earnings forecasts across the sector could come under further pressure.
In that scenario, companies with greater exposure to upstream oil production are expected to outperform those more reliant on refining.
JPMorgan said this favours Shell and Eni, while more refining-exposed groups such as Repsol SA could face greater downside risk.