Gasoline prices are rising again – up more than 30 cents a gallon in the past month and around 15 cents in the last two weeks alone. Motorists should brace for more pain.
One reason is that the global market for refined products is about to be upended by the latest European Union (EU) sanctions on Russia’s petroleum industry.
On February 5, the EU will ban imports of Russian refined products like diesel, jet fuel, gasoline, and heating oil. While global oil markets have recently handled a similar ban on Russian crude imports quite well, these product sanctions could be far more disruptive.
Markets for refined fuels are much more complex than for crude, with refineries configured to process certain types of feedstock crudes and to manufacture varying slates of products, depending on regional demand patterns.
The issue for Europe is that it relies on Russia for about 40 percent of its refined product imports and has been heavily dependent on Moscow to make up for its historical deficit of diesel production.
Global diesel supplies are already tight. It’s unclear how Europe will replace nearly 500,000 barrels per day of Russian diesel, especially since the continent has shut down over 1 million barrels a day of refining capacity in the past few years due to the global pandemic and radical climate policies.
Importing from non-Russian sources means competing with other buyers who are physically closer to the source, like Latin America in the case of U.S. diesel or Singapore in the case of Indian diesel.
Europe will have to rely heavily on new large-scale refineries in India and the Middle East, as well as a pick-up in China exports to replace Russian supplies.
But there are many reasons to think this realignment of diesel and refined product markets won’t go as smoothly as with crude, which is a far more fungible commodity.
For starters, the sanctions are coinciding with the reopening of China’s economy, which means that China’s big refineries could be more focused on satisfying rising demand at home than on exports. Indeed, optimism about Chinese demand has recently driven crude prices to nearly $90 a barrel for benchmark Brent.
If Europe pays a premium to import diesel from alternative sources like the Middle East, Asia, or North America, it will leave these markets with deficits. The easy solution would be for Russia to start shipping diesel to these markets, but unfortunately, it’s not that simple.
Refined product tankers tend to be smaller and designed for short-haul routes, while Russian barrels, once destined for high-specification markets in Europe, will likely have to compete with cheaper, high-sulfur diesel in markets such as west Africa and Asia.
The logistical and market challenges mean that Russia probably won’t be able to place all its diesel and refined products exports. That would force Russian refineries to cut production of these fuels altogether, contributing to a global product shortage.
Bear in mind that Russia already must market its crude at steep discounts to attract non-European buyers, selling its Urals crude to India and China for around $45 a barrel, a discount of roughly $40 to the benchmark price.
Facing an even more dire product situation, Russian President Vladimir Putin said Moscow would prioritize crude exports over product sales. Markets also can’t rule out the possibility of Putin weaponizing diesel exports, as he has done with natural gas.
Russian refinery throughput could drop by 900,000 barrels per day after February 5, resulting in the loss of 650,000 barrels per day or more of product exports. That would come as most global refiners reduce runs in the spring to perform regular seasonal maintenance.
Such a scenario would see diesel prices and profit margins soar, prompting global refiners to maximize fuel production and fuel yields. But they would need to cut output of other products like gasoline, jet fuel, and heating oil to do this, which means the supply tightness would spread to other fuel markets – and lift the entire global petroleum complex.
For refiners, it would turn into a high-stakes game of “whack-a-mole” as they adjust yields to address the biggest shortages across the spectrum of fuels. But they could come up short without Russia, one of the world’s top fuel exporters, at full strength.
Consumers could be dealing with significantly higher fuel prices just as the global economy starts normalizing.
In the United States, motorists are now dealing with gasoline pump prices that have crept back up to $3.50 a gallon, while truckers are grappling with diesel prices north of $4.60 a gallon.
These markets face serious turmoil in the months ahead, meaning these prices may be the best consumers see in 2023.
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