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Anyone driving back home from their summer holidays in the last couple of weeks cannot have failed to notice that petrol and diesel prices are rising again.
The increase in UK pump prices during August was one of the biggest monthly jumps on record, according to the automotive services group RAC, which pointed to a rise of 7-8p on average in the cost of a litre of fuel to about £1.52-£1.55 a litre. Higher petrol pump prices are not limited to the UK, with gasoline jumping in the US, Europe and Asia, too.
Part of this is easily explained by stronger crude oil prices in recent weeks — Brent crude has risen from $78 a barrel in mid-July to top $90 a barrel on Tuesday, largely driven by output cuts by Saudi Arabia and Russia. But a less well understood factor is refining costs.
Petrol, diesel but also jet fuels have been on a tear in recent weeks due to limits in refining capacity. Take diesel. While crude is up about 14 per cent of late, wholesale diesel prices in Europe have jumped more than 25 per cent. Gasoline has also posted strong gains, with prices largely catching up and even overtaking diesel in wholesale markets.
The International Energy Agency said in its last oil market report that refiners were enjoying “near-record profits”.
The short-term factors driving the strength in refined fuels range from low inventories to stronger demand from airlines and motorists during the summer months. Refiners and wholesalers may be keen to keep fewer barrels in stock, as higher interest rates make financing stockpiles of fuel more challenging.
But the longer-term issue is one of capacity and availability of the right kinds of feedstocks. Europe’s refineries are generally older and less competitive than more modern plants opening in Asia, so when the pandemic hit three years ago the weakest plants shut their doors for good. About 5 per cent of Europe’s refining capacity was lost during this period, leaving the regional market tighter now that demand is mostly back to normal.
The war in Ukraine has further complicated supplies, as sanctions have largely barred Russian barrels from the European market. Russia was the single largest exporter of diesel into the EU before 2022.
The IEA believes European refiners may also be struggling to get the same processing yields, having had to replace Russian crude barrels as feedstock, which many plants were configured for.
“The shift to alternative, suboptimal crude grades have pushed refineries to processing limits,” the IEA said, warning that it expected European refining runs to be about 5 per cent lower in the third quarter than they were last year.
While the oil market has done a relatively impressive job of reorganising supplies, with more diesel now coming to Europe from India and the Middle East, shipping times are longer and more expensive.
There is little appetite in Europe and the US to invest in new refining capacity, despite the strong margins on offer, as the growing uptake of electric vehicles is eventually expected to cut deeply into demand.
The global picture may soon provide at least a modicum of relief for motorists, though it is unlikely to be a panacea. Aliko Dangote, Africa’s richest man, is due to start up his 600,000 barrel a day mega-refinery in Nigeria soon, potentially before the end of this year.
Recently completed plants in Saudi Arabia, Kuwait and Oman are also ramping up, with the IEA predicting that refinery processing globally will rise about 1.9mn barrel per day this year. Chinese refiners have also been handed larger export quotas by Beijing.
Analysts at Energy Aspects argued this week that some speculative traders are likely to unwind recent bets on price gains in refined products continuing to outstrip crude. But strong refining margins are, for the moment, unlikely to collapse.
“Robust demand and underperforming runs due to crude and feedstock mismatch issues will mean some tightness persists into 2024,” Energy Aspects said.
The bigger fear around how much we pay at the pump may be that, even if refining margins do cool off somewhat, crude prices could well keep rising. With Saudi Arabia saying on Tuesday it will extend voluntary crude production cuts until the end of this year, Brent prices appear to be pointing higher, moving above $90 a barrel for the first time in 2023.
That may contribute to reducing the margins refiners are earning, but it will provide little succour for drivers. Summer might be over. But a winter of discontent still looms on forecourts.