Mention the price of diesel to anyone in the industry right now and a wince is likely to follow.
And no wonder. The diesel ‘crack’ is at a record high. The crack is an industry term for the refining margin. It traded as high as US$98 ($139) per barrel in recent trade. The typical level is about US$20.
There are multiple pressure points here for the oil industry. One is Ukraine’s attacks on Russian refineries, aimed at disrupting exports and the revenue that helps fund Russia’s war effort.
A second is that petroleum products are still restricted from flowing through the Strait of Hormuz.
A third pressure point has now emerged. Houthi fighters attacked a Saudi refinery last week. Saudi oil major Aramco confirmed a fire broke out in the city of Jizan on the Red Sea.
Any major loss of Saudi capacity would be another hit to the global flow of diesel.
The International Energy Agency (IEA) reports that global refinery crude throughput in July was five million barrels per day below the level recorded 12 months earlier.
It’s also hitting consumers in the US economy.
The Financial Times reported recently:
“Surging exports of refined products such as petrol and diesel to customers previously reliant on the Middle East have helped to push up US domestic gasoline prices above US$4 [$5.67] a gallon, a rise of about 35% since the war began on 28 February.”
It’s also having another effect: demand destruction.
This week the Organization of the Petroleum Exporting Countries (OPEC) lowered its oil demand growth forecast to 580,000 barrels a day — the fourth straight revision lower — according to Reuters.
The IEA expects demand to decline.
For now, ‘Big Oil’ is generating record cash flows as higher oil prices and even higher product prices generate huge returns.
Bloomberg columnist Javier Blas suggests that the firms involved are using the money to pay down debt because they expect lower prices in 2027 and 2028.
It hinges on one thing, at least in his mind: the opening of the Strait of Hormuz.
It is unclear how much oil and refined products are waiting to exit once — or if — the Strait reopens, but the volume could quickly run into the millions of barrels.
Some in the oil industry suggest that the global economy will absorb this alongside the necessary restocking of inventories that are running down while the Strait remains closed.
It’s not clear if this claim is true. For example, China was a major buyer in previous oil market lows but is increasingly turning to electric vehicles and trucks as part of industry policy.
By 2030, the Chinese Ministry of Transport expects electric trucks to make up 40% of new sales and 20% of the total fleet. This will cut diesel road use. China may not require the same level of reserves in future years, or the rest of the world for that matter.
There is an old saying in commodity markets: ‘The cure for high prices is high prices.’
Refiners may be making record margins right now. But it won’t stay that way forever. The only question is how long those margins will last.
Write to Callum Newman at Mining.com.au
Images: Bloomberg & Unsplash
