Diesel prices surged earlier this week on news about yet another Ukrainian attack on a Russian refinery and a Houthi attack on a Saudi refining facility. Global fuel supply is already out of balance, and the continued refinery disruption will only aggravate the situation, right before peak demand season. reported Monday that refining margins in Europe had surged by 10%, and that surge was from an already elevated starting point as refiners around the world see their margins rise to all-time highs on the supply tightening caused by the war in the Middle East and the Ukrainian drone attacks on Russia's refinery network. In the United States, the report said, diesel futures booked their sharpest rise since July on Monday, adding 7.4% to $4.19 per gallon.
The average retail price for a gallon of diesel was $5.32 on Tuesday, according to AAA data. That was up from $4.88 per gallon a month ago and $3.71 per gallon a year ago. To put it mildly, this is problematic.
Diesel is often referred to as the workhorse of any economy. Indeed, economies run on diesel, which is used for everything from freight transportation to farming, to heating during the winter. If diesel prices are consistently higher for an extended period of time, they will inevitably be passed on to consumers, fueling a more generalized inflation trend.
Related: EIA Sees Massive Uptick in US Crude Oil Inventories "Refining margins remain elevated because every additional barrel of product has become significantly more valuable than every additional barrel of crude," Kpler lead analyst for refining supply and modeling, Sumit Ritolia, told the Wall Street Journal this week. Indeed, refining margins are breaking records this year, with the WSJ noting that the 3-2-1 crack spread used as a sort of refining margin benchmark had gone up to over $70 per barrel—from a usual level of less than $20 per barrel. What's more, refineries are operating at higher than usual utilization rates to make up for lost supply from the Middle East and Russia, but there are limits to how much they can ramp up production.
"Refinery utilization above 90-95% simply means there is very little operational flexibility left," Kpler's Ritolia told the Wall Street Journal. Exxon and Chevron recently reported utilization rates of 95% to 97%, while Shell reported utilization rates of over 100%. Now, refineries are beginning to enter maintenance season, which has become even more essential than it already is to ensure fuel supply security.
However, refinery season does mean that some output will be temporarily lost, likely pushing fuel prices even higher. In some parts of the world, there is a refinery shortage, as well. One such part is Europe, where refineries have been closing for years, as national governments and the central EU government pushed ahead with their decarbonization agenda that envisaged mass electrification of transport.
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