Europe refiners rush to make more gasoline after diesel hangover

* Refiners tweak crude oil feedstocks to favour gasoline

* Gasoline refining margins shine as diesel languishes

* Strong demand for gasoline set to continue in 2016

By Ron Bousso

LONDON, Jan 12 (Reuters) - After years of building up diesel production, European oil refiners are using every trick in the book to maximize gasoline output to meet unabated global demand as the two fuels stage a sharp reversal of fortune.

Many operators on the continent, including Total (Swiss: FP.SW - news) , BP, Royal Dutch Shell (Xetra: R6C1.DE - news) and ExxonMobil, have invested hundreds of millions of dollars over the past decade to increase production of diesel, the road fuel of choice in the region, while seeking to lower gasoline output, seen as a mere "by-product" of that process until recently.

But today the world faces a growing excess of diesel and spectacular demand in Asia and the United States for gasoline and naphtha, a feedstock for plastic manufacturing.

While oil refineries can not maintain high output of gasoline without also ramping up diesel production, they are now taking every possible step to tweak production in order to favour gasoline and naphtha.

One such step is using as feedstock lighter crude oil grades with higher yields of gasoline and naphtha. For example, light Nigerian crude prices have outperformed heavier grades

Some refineries have also opted to lower operating levels, or runs, in diesel producing units known as hydrocrackers.

In recent weeks, as naphtha cracks surged to record levels, some refiners have tweaked the distillation boiling temperature, or "cut point", in order to favour naphtha over kerosene and jet fuel, according to refinery sources and traders.

The results are already showing -- yields of middle distillates, which include gasoil and diesel, dropped to around 50 percent in December, date from industry monitor Euroilstock showed, the lowest in around 6 years.

"We expect European refiners to do all sorts of things... They are already doing this as the market is sending such strong signals. We will see fractions pulled out of the diesel pool and moved into jet and we will see naphtha fractions taken out of jet and moved into light ends," according to Robert Campbell, head of oil products research at consultancy Energy Aspects.

Benchmark European gasoline refining margins, or cracks, rose to around $15 a barrel this week -- nearly three times higher than a year ago and ten times above 2013 levels -- as demand in China and Asia for the road fuel remains unabated.

Diesel cracks, on the other hand, have languished due to rising global production, slower demand and a mild winter that has filled storage tanks to the brim.

The small changes in refining slates are having an incremental effect. A 1 percent swing in yields could lower Europe's diesel production by more than 250,000 tonnes per month, according to Campbell.

"It (Other OTC: ITGL - news) is not enough by itself to right the market but would help a little bit. A similar development in the U.S (Other OTC: UBGXF - news) . Gulf Coast would shave another 150,000-200,000 tonnes off the balance and that starts to have a pretty significant effect on the overall number of cargoes being shown."

The global shortage in gasoline is expected to continue this year too.

"With (Other OTC: WWTH - news) new refinery additions less tailored towards light products and increasing demand for petrol in Asia, it appears increasingly likely that the market could find itself short of gasoline again as it did over the summer of 2015," Barclays (LSE: BARC.L - news) said in a note.

In the near term, the sharp decline in crude oil prices due to a persistent supply glut is likely to support refining margins but Energy Aspect's Campbell expects "modest" cuts in refining rates in both Europe and the United States.

Once crude supplies tighten towards the end of the year, "that support will go away and margins will really struggle," he said.

(Additional reporting by Libby George and Ahmad Ghaddar, editing by William Hardy)