refining margins and freight prices are skyrocketing

The price of a barrel of WTI, the US benchmark of crude oil, is now equal to or even higher than the price of Brent, the European benchmark. On Friday they both moved around $112. We have to go back to 2020 to find the same phenomenon. Over the month, the price of WTI rose by 7.6% against 3.4% for Brent.

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Brent pumped into the North Sea serves as a benchmark not only for Europe, but also for Africa and the Middle East for transactions between producers and consumers.

Cushing reserves

West Texas Intermediate (WTI), produced from fields located in the United States, is primarily purchased and processed locally. It is stored in reserves located in Cushing, a city in Oklahoma that serves as a barometer for the North American oil market, which is also low.

This high WTI score is also partly due to Western sanctions on Russia. The United States has imposed a weeks-long embargo on imports of crude oil and petroleum products, refiners are turning to local oil to supply markets, pushing up the price of WTI. Indeed, the latter is lighter and more sulphurous, and easier to process for gasoline production, while Brent is better suited for diesel and gas oil production.

In Europe, an agreement on such an embargo has not yet been reached, because. “some EU states, whose share of Russian hydrocarbons in the energy balance is especially high, will not be able to do without our oil for a long time to come”Vladimir Putin joked on Tuesday. However, these imports are declining. “The most important market for the export of Russian oil and oil products remained the European Union with 3.4 million barrels per day, or 43%. This share, however, has decreased from 535,000 bpd, as at the beginning of the year”highlights the International Energy Agency (IEA) in its latest monthly report. (see picture).

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IEA oil

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In the United States, this WTI increase is displayed on gas station pumps. A gallon (3.78 liters) on Friday averaged $4.593 ($6.6 in California), according to the AAA website. This is a record level. A year ago, it was $3.04, an increase of 51%, while over the same period the price of a barrel of WTI rose by 76% (+69% for Brent).

There are also two other factors to consider: transport and processing. “Historically, tanker prices have risen during periods of low oil demand as onshore storage capacities approach their maximum, resulting in increased demand for tankers as a source of floating and flexible capacity.”emphasizes the US Energy Information Agency (EIA).

However, this configuration was violated by Western sanctions against Russia and the American embargo. “Since February 2022, tanker tariffs for oil products operating in the ports of Russia and Europe have been increased due to geopolitical uncertainty and insurance premiums for risk”, notes the EIA in its weekly bulletin. From January to April, they increased by 63%.

For its part, the European Union is importing more products such as diesel or gas oil from the United States to offset imports, which has led to a 233% jump in freight prices between the US Gulf Coast region and the European continent since January. and April. In terms of crude oil transportation, prices between the Baltic Sea and the European continent rose by 447% over the same period due to risk premium insurance costs.

Another factor supporting oil prices is refining. “Growing demand and rapidly depleting inventories have driven refining margins to record highs across all regions and configurations”, notes the IEA. According to him, the gasoline refining margin in the period from March to April jumped in the US by an average of $10 and reached $40 per barrel. In Europe, which is a net exporter of gasoline, the cost of refining more than doubled to $21.40 a barrel.

Growth is more noticeable for the production of diesel fuel. That costs an extra $10 a month, or a record high of $47.20 a barrel in Europe, a configuration that is attributed to diesel shortages, the IEA says.

Increasing refining capacity in Asia

Part of the problem also arises from a reduction in refining capacity in Europe and from a model that is less suited to European needs. Between 2009 and 2019, BP’s throughput was declining by 3.2% per year, falling to 15.3% of global capacity, according to BP’s annual report. If in North America they remain at the level of 21.4%, then in the Middle East and Asia they grew the fastest, reaching 10% and 35.8% respectively.

And this must continue. Refining capacity, which stands at 105.6 million barrels per day in 2022, should increase by more than 10% between this year and 2026, mostly in Asia, according to Global Data forecasts. The countries that will open the most additional capacity will be China, India and Nigeria.