The capacity challenges are exacerbated by the certainty that there will be continuing closures of existing refineries and diminishing investment in new capacity as, particularly in the West, environmental pressures and the electrification of vehicle fleets is seen as a growing threat to the economics of the facilities.
The climate change and electrification shadows that hang over the refining sector blunts what would conventionally be the incentives to invest and prolong the lives of refineries provided by near-record margins.
In the near term, with plants in the US and Europe impacted by fires and in both regions (and in Russia) refineries entering the seasonal heavy maintenance period there are other immediate influences on refining capacity.
Diesel is the workhorse of the global economy. And it is in increasingly short supply. Credit: Gabriele Charotte
The imbalances between diesel supply and demand could be even greater if not for the faltering of China’s economy and therefore of its demand.
Having gorged on cheap Russian oil, thanks to the G7 (plus Australia) sanctions on Russian oil and distillate exports shutting it out of other major markets, China has been processing and exporting some of its excess inventory.
Loading
The sanctions include a $US100 a barrel price cap on Russian products that sell at a premium to crude oil, the most significant of which is diesel. International prices have been around $US125 a barrel and, unusually, above the price of crude.
The sanctions would have some effect on Russia’s exports but, to try to dampen rising domestic fuel costs and to fuel its war efforts, diesel that might otherwise have been exported has been redirected to the domestic market, adding to the pressure on global supply.
Globally, stocks of diesel and other refined products have been falling to their lowest levels since the start of the year and the supply-demand equation will probably get worse in the near term and could get significantly worse if the array of small measures China has taken to try to stimulate its faltering economy are successful.
Diesel is the workhorse fuel within the global economy, not just powering trucks and cars but essential in agricultural industries, construction, manufacturing, non-electrified rail transport and shipping.
If current high prices are sustained they will feed even more insidiously and widely into industry and consumer costs and prices than the spiking petrol prices.
Unless the Saudis and Russians have a change of mind and strategy and begin unwinding their production cuts, there’s no obvious relief valve from their squeeze other than the downturn in demand that would come from a significant global recession.
Last month, with oil prices nearly $US3 a barrel lower than they were on Monday, the higher petrol prices contributed more than half the 0.6 per cent increase in the US inflation rate.
While it might take longer for the elevated diesel price to show up in inflation data, it will contribute to inflation rates that will be higher than they might otherwise be. In turn, that would create pressure for central banks to raise interest rates or, at least, leave them at higher levels than they might otherwise have done.
Loading
The global economy is brittle. China is experiencing significant issues, Europe is struggling and, while it has been surprisingly resilient, the US economy is showing some signs that 18 months of rising interest rates are finally taking their toll.
The Federal Reserve Board is meeting this week and is expected to keep US rates on hold, although there is the possibility of another 25 basis point hike.
While it tends to focus on “core” inflation rates, or rates that exclude food and energy costs, any commentary on the outlook for inflation, particularly for energy costs, will be pored over and would have implications for equity and bond markets.
Most of those who follow the oil industry believe that oil inventories will continue to deplete – demand will continue to be greater than supply – and that there is a real prospect of oil prices above $US100 a barrel in the near term, which would imply even higher prices for diesel.
Unless the Saudis and Russians have a change of mind and strategy and begin unwinding their production cuts, there’s no obvious relief valve from their squeeze other than the downturn in demand that would come from a significant global recession.
That’s not something we – or they – would want to experience. They’re treading a delicate path.
The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.