Markets have recently lost nearly 5 million barrels per day of supply as facilities in the Gulf were disrupted and Russian refining capacity went offline, pushing the refining sector back to the top of governments’ agendas and driving European diesel prices to a record $200 per barrel.
Refinery disruptions exposed the vulnerability of the oil products market despite increased crude supplies in recent weeks, as the recovery in fuel supplies remained limited even after crude flows from the Middle East improved. U.S. diesel prices hit a record as refined-products supply fell sharply.
Declining refining capacity
U.S. refineries are currently operating near full capacity in an effort to make up for the shortfall, limiting the market’s ability to quickly increase fuel production if additional facilities are disrupted. Europe faces a more difficult situation after dozens of refineries were closed or converted in recent years, increasing the continent’s reliance on fuel imports.
Since 2009, one-third of Europe’s older refineries have closed or changed their operations, reducing the continent’s ability to withstand supply shocks compared with Asia. The United States and Europe process more than 2 million fewer barrels of crude per day than they did in 2010, despite continued strong demand for fuel used in transport, agriculture and industry.
Dave Sanyal, head of European fuel refiner Varoprime, said European fuel products were experiencing a price surge because of the Iran war and Ukrainian attacks on Russian refineries.
Oil-products export map
The United States is the leading exporter of oil products, at more than 6 million barrels per day, according to data from the U.S. Energy Information Administration, followed by Russia with about 2.5 million barrels per day of refined products, particularly diesel and fuel oil bound for Asian markets.
Saudi Arabia’s exports amount to 1.34 million barrels per day, compared with about 1.31 million barrels for South Korea. China exports 1.14 million barrels of refined products per day, despite being the world’s largest producer, with capacity exceeding 18 million barrels per day. India is also among the major exporters.
Rebuilding refineries requires coordination
Manouchehr Takin, chief oil analyst at the Global Energy Studies Centre, said the refining problem would not be solved overnight because it was the product of three decades of globalization in the refined-products market, refinery closures to avoid high production costs, and reliance on imports from Singapore and the Middle East as part of an outsourcing strategy.
Takin added that the shortcomings of the outsourcing strategy are now becoming apparent, pointing to U.S. President Donald Trump’s criticism of the policy and his call to bring factories and refineries back to the United States, rather than merely seeking to reduce reliance on foreign supplies.
European governments hold inventories of 400 million barrels and seek to retain them against any future supply disruption, but they have faced U.S. pressure to use some of those stocks to meet rising demand for diesel, which Takin described as the lifeblood of the agriculture, transport and shipping sectors.
Takin said rebuilding Europe’s refineries depends on private-sector decisions, after weak profit margins became a key factor behind refinery closures and reliance on imports. He added that addressing the crisis requires broad coordination between governments and companies, as countries’ security, defense, education and healthcare commitments constrain their ability to direct budgets.
