Global refining capacity strained
Price of home heating oil to become next affordability flashpoint
Diesel prices to hit farmers during harvest season
Global energy markets continue to focus on crude prices, but as I have written before, it’s more than the black gold being transported in tankers through the Strait of Hormuz.
Refineries, used to process crude to make diesel, marine fuels, jet fuel, and other products like propane for home heating, are stretched to capacity.
“This is gradually becoming a major crisis,” warned Neil Atkinson, Energy Analyst & Senior Fellow at the National Center for Energy Analytics.
Atkinson said attacks on Middle Eastern refineries by Iran have cut regional product exports from a normal level of about 5 million barrels per day. Ukraine’s strikes on roughly 20 Russian refineries, storage sites, and terminals are further reducing Russian product availability.
The result: a global refining system under sustained stress, with limited slack to absorb further shocks. Refined products and petrochemicals are critical to global transportation and the supply chain.
“So much of the refining capacity to turn crude into diesel and gasoline has been damaged,” said Andy Lipow, president of Lipow Oil Associates. “
In a Lloyd’s List briefing, Atkinson explained oil itself “is useless” since it has to be refined into something in order to be used. But what is becoming increasingly alarming to him is that not only are current oil stocks at very low levels by historical standards, the stocks of refined products are also low.
“Diesel prices are roughly the equivalent in the United States of $200 a barrel,” said Atkinson.
“This is gradually becoming a major crisis because the prices themselves are very high, but the physical stocks of these products are dwindling, and one of the reasons is that refinery capacity globally is heavily stretched,” he continued. “Unless demand falls off a cliff, the system will continue to be stressed.”
The United States, which is energy efficient and exporting crude and LNG to the world, is facing its own refined energy crunch.
“Distillate inventory in the Lower Atlantic, which is Virginia/West Virginia, down the east coast to Florida, is down 40% over a year ago’s levels,” said Andy Lipow, president of Lipow Oil Associates. “This week’s EIA inventory of 6.787 million barrels is at the lowest level ever reported on the EIA website since November 1990.”
“The global refining system is having to work flat out to ensure that there is still plenty of oil product available to the market,” said Atkinson. “But those products are costing more and more money, and this cannot go on forever because unless demand really does fall off the cliff in reaction to higher prices, we will be in a situation where the system will continue to be stressed.”
This Labor Day weekend, U.S. travelers are facing the highest gas prices ever for this time of year. The national average is $4.14, up 4 cents from last week, according to AAA.
California leads the nation in diesel prices at the pump at $7.218. Gulf states are the lowest at $5.537.
“Diesel hasn’t really been talked about much because the consumer doesn’t buy diesel all the time,” said Lipow. “So they don’t see the price increases. But the higher diesel fuel prices act like a stealth tax because you don’t see it going into your tank. You see it through higher prices of goods and services. Agricultural goods are the first to see price increases. They have the shortest supply chain.”
U.S. President Donald Trump has said numerous times that the oil companies should lower their prices given their record profits.
Top U.S. refiners posted record-shattering second-quarter earnings.
Valero Energy’s refining operating earnings tripled, reporting a record Q2 profit of $12.54 per share on $3.7 billion in net income. Marathon Petroleum’s marketing margins doubled year-over year to $36.33 per barrel. Valero, Marathon, and Phillips 66 returned a combined $6.3 billion to shareholders via buybacks and dividends in Q2. This was more than double last year.
‘You can have all the crude you want, but here in the U.S. our percent refinery utilization is 98%. You are not going to get any more out of it,” said Lipow.
Higher diesel prices at the pump have eaten into logistics companies’ margins this peak season. Fuel surcharges are also being passed on to the shipper. Now with harvest season starting, the additional tractor time will cost more for farmers.
“So we will get a pop in demand over the next couple of months,” said Lipow. “Midwest diesel supplies are okay. They’re not running out. The Rockies have plenty, but California, New England and the Southeast from Virginia to Florida are really tight, so that’s driving prices up for everybody.”
Higher gasoline and food prices have been driving headlines for months ahead of the Midterm elections. But that list is about to get a little longer and pricier. Many Americans will start turning on their furnaces to heat their homes.
“In addition to oil, propane prices can get dragged up as well,” said Lipow. “The northern part of the U.S. Michigan, Minnesota, the Dakotas, the Northeast will be impacted. When they get that first load of heating oil, say the tank is 150 gallons, they are going to look at that bill and say, ‘Holy cow, that’s 300 dollars more than last year!’ There is no telling what that does to consumer spending in the New England market.”
Atkinson said the higher energy prices and the political calendar are part of the Iran war strategy.
“The Iranians are determined to do everything they can to make life as difficult as possible for Trump and Republicans between now and the first week of November,” said Atkinson.
“Iran has adopted the rope a dope strategy, perfected by Muhammad Ali 50 years ago, where you sit back on the ropes and just let your big opponent punch themselves out,” he said. “This is what the Iranians seem to have been doing vis-à-vis the U.S. over the last six months or so. There is no question Iran is going to face more economic difficulty. But it’s a regime which is determined to retain power. I don’t really see anything much changing in the next few months in Iran.”