Oil refinery

Distillate prices rise on crude oil rally and refinery issues

Published by ChAI
Aug 3 2023

The price of gasoline and other distillate fuels have rallied in recent weeks at a faster pace than the upstream crude oil benchmarks. At a time when central banks around the world appear to be nearing the end of their respective cycles of interest rate increases as inflation slows in major economies, a rally in energy markets could cause concern. In this week’s blog, we will look at the primary causes behind the recent price rises in gasoline and other distillate markets and how this situation may develop further.

Unleaded gasoline

Crude Oil Price Forecast on Increase

When looking at the changing prices of distillates, the most important driver is the costs of the upstream products. Having spent over two months, from late April to early July, trading within a range from $71 to $79, Brent crude oil prices have been on the rise since the last week of June and broke out of their range in the first week of July. In the past week, prices have closed as high as $85 and settled at just over $83 on Wednesday 2nd August. The story for WTI prices has been similar, with the benchmark having briefly climbed above the $80 mark last week and currently sitting just below it.

The increase in crude oil prices stems from the production cuts made by OPEC+, and more specifically by Saudi Arabia and Russia. In June, Saudi Arabia announced it would be reducing production by 1 million barrels per day for the following month. This cut was subsequently extended for August, and more recently there has been speculation that it will continue for September as well. Meanwhile, Russia announced that it would be cutting its oil exports by 500,000 barrels per day in August. When Saudi Arabia first announced its voluntary production cuts in June, it did not have the price-lifting effect that would have been expected by many. However as time has passed, the reality of the depleted production and consecutive extensions of the production cut have eventually driven oil prices upwards.

As oil prices rose out of their trading range, the price rise has been compounded by trading activity. As noted by John Kemp for Reuters, investors rushed to cover their short positions as prices rose, which further fuels the upward movement. While crude oil markets have been rather subdued this year in comparison to 2022, there are many bullish investors for whom the range-break of early July will spark optimism that crude price may yet climb back above the $90 mark and beyond this year.

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Refineries Run Into Issues

Another key issue behind prices for gasoline and other distillates rising has been a reduction in refining utilization while demand has remained high. As reported by Bloomberg, gasoline demand in Europe has recovered well this year “with France, Germany, Spain and Italy all posting year-on-year increases in consumption.” The United States, meanwhile, is in the middle of its ‘driving season’, the summer months between Memorial Day and Labor Day weekends during which gasoline demand reaches its annual peak.

Amid the high levels of demand, there have been several issues impacting refinery utilization recently. In Europe, Shell announced it would be temporarily closing its Pernis refinery plant in early June due to a leak, but provided no further information regarding the cause of the issue or the duration of the closure. Pernis, located in Rotterdam, is Europe’s largest refinery site and is capable of processing around 400,000 barrels per day. Across the Atlantic, Exxon Mobil had to close its Baton Rouge refinery site, the fifth largest in the US, in late July for unexpected repairs which may impact the plant for the rest of the summer.

Alongside issues at specific refineries, the recent heatwave that has scorched much of the southern United States has also impacted the region’s refining capability. Extremely high temperatures cause refineries to reduce processing in order to avoid damaging any equipment. The cumulative effect of the refinery issues, as well as a natural slowing of processing as the summer passes by, has meant that the refinery utilization rate in the US has dropped by 3.1% from the first week of June to the end of July. Over the same period in 2022 it declined by 2%, while in 2019 it only dropped by 0.2%.

Going forward, any rise in fuel prices will be watched closely by the Federal Reserve and other central banks, as fuel prices can have large impacts on inflationary pressure. Furthermore, in the past few days there appears to have already been a softening of the upward trajectory these markets were taking. Tight inventories across these products, alongside traders positions and refinery utilization rates, will be key indicators for the price development in the coming months.

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