The world is running short on fuels—the warning was first issued by some analysts who were watching the physical market rather than futures charts. Now, Big Oil is joining the chorus of warnings, with Shell, Exxon and Chevron all saying that prices at the pump are set to stay higher, regardless of where crude oil prices go.
“The constraint pain point in the energy system is refining," Exxon’s chief financial officer Neil Hansen told Bloomberg in an interview last week. This, according to him, is “something that perhaps the market isn't fully focused on.”
Indeed, most oil market observers have focused exclusively on futures prices even when the gap between those and physical oil prices has been quite substantial as a result of the export flow disruption in the Middle East that has now spread from the Strait of Hormuz to the Red Sea as well. Futures prices are currently down from last week’s peak on President Donald Trump’s latest declaration of peace talks—but physical markets are in a very different place, and that is especially true of refined products.
Bloomberg reported last week that the wars in the Middle East and Ukraine, plus China’s caps on fuel exports—and Russia’s ban on diesel exports—have effectively slashed global refining capacity by as much as 10%. This may not sound like much at first glance, but it is a significant enough number to have some observers worried.
As early as April, Energy Aspects and Rystad Energy warned that global fuel inventories were getting squeezed by the Middle East war since the region, besides being a leading crude oil exporter, is also a major exporter of refined products. Now, more analysts are sounding the alarm as the U.S. and Israeli war against Iran enters its sixth month.
“We’re in a diesel supply crunch right now because none of the Persian Gulf refineries can get product out,” Rabobank senior energy strategist Joe DeLaura said, as quoted by the Wall Street Journal last week. “Crude oil is just the input, but diesel is the everything the industrial economy runs on,” he also said. “Everything in agriculture, everything in construction, everything in mining. Also everything on the supply and distribution side runs on diesel.”
Exxon’s chief executive gave the fuel squeeze story a dramatic twist last month, saying on a call with analysts that “I've never seen the available capacity relative to demand as low as it is today,” and adding, as quoted by Bloomberg, that “It's going to take a while for the industry to climb its way out of that hole.”
Shell’s Wael Sawan, meanwhile, told CNBC that “Today, what you're seeing is all the price signals that we are short on diesel and gasoline. Which means we need to be able to now reoptimize at the refining side,” the top executive also said.
In further comments on the state of fuel inventories globally, Chevron’s chief financial officer, Eimear Bonner, told Bloomberg that “The geopolitical uncertainty has tightened markets and is reinforcing the importance of reliable supply. The shock absorbers that have mitigated the volatility up until now, those continue to be drawn down.”
This is why crack spreads are running at record highs, U.S. refineries are also running at record highs—and this is a problem because maintenance season typically begins in September and lasts through October; and maintenance season means a dial-down in processing rates. In the past, refiners have postponed maintenance season to capture a period of stronger demand, but this time, this may be unwise.
According to Bloomberg, Exxon’s refineries along the Gulf Coast have been running at a utilization rate of 95%, and Chevron’s refineries have been running at 97%. Shell’s refineries, meanwhile, have actually topped 100% utilization rates, clocking in at 102% over the second quarter. This utilization rate cannot be maintained over an extended period of time without the risk for adverse consequences rising, which means there will be maintenance—and lower fuel production.
“Fall is particularly difficult, kind of like a perfect storm right now,” the owner of a freight brokerage told the Wall Street Journal. “When we have the harvest and we have the early heating demand, and we also have the war, the tight squeeze on diesel is going to directly affect basically the entire economy,” Hannah Hurckes from Boss Lady Logistics told the publication.
Early in the war, some analysts predicted crude oil prices of up to $200 per barrel. This never happened because of President Trump’s regular announcements about escalation or de-escalation, regardless of how events develop on the ground. Meanwhile, in physical markets, the squeeze on supply out of the Middle East has left its impact on fuel production—while demand has remained strong because of the fundamental nature of fuels for any economy.
By Irina Slav for Oilprice.com
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