Global Refiners Are Failing in Efforts to Meet Demand

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By Laura Sanicola

(Reuters) – Refiners around the world are struggling to meet global demand for diesel and gasoline, exacerbating high prices and deepening shortages from big consumers like the United States and Brazil to smaller countries like war-torn Ukraine and Sri Lanka.

Global fuel demand has rebounded to pre-pandemic levels, but the combination of pandemic shutdowns, sanctions on Russia and export quotas in China is straining refiners’ ability to meet demand. China and Russia are two of the three largest refining countries, after the United States. All three are below peak processing levels, undermining efforts by world governments to lower prices by releasing crude oil from reserves.

Two years ago, fuel manufacturing margins were in landfills due to the pandemic, leading to multiple shutdowns. Now the situation has reversed and the tension may persist for the next two years, keeping prices high.

“When the coronavirus pandemic happened, global demand for oil was not expected to fall for long, and yet such refining capacity was cut off for good,” said Ravi Ramdas, chief executive of energy consultancy Peninsula. Energy.

Global refining capacity fell in 2021 by 730,000 barrels per day, the first drop in 30 years, according to the International Energy Agency. The number of barrels processed daily fell to 78 million bpd in April, the lowest since May 2021, well below the pre-pandemic average of 82.1 million bpd.

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Fuel inventories have fallen for seven consecutive quarters. So while the price of crude oil has risen 51% this year, U.S. heating oil futures have risen 71%, and gasoline refining margins in Europe have recently hit a record at $40 a barrel. STRUCTURALLY SHORT

The United States, according to independent analyst Paul Sankey, is “structurally short” of refining capacity for the first time in decades. U.S. capacity was down nearly 1 million barrels from pre-pandemic to 17.9 million bpd in February, according to the latest available federal data.

LyondellBasell recently said it would close its Houston plant, which could handle more than 280,000 bpd, citing the high cost of maintenance.

Operating U.S. refiners are running at full capacity to meet demand, especially for exports, which jumped to more than 6 million bpd, a record. Capacity utilization is currently over 92%, the highest seasonally since 2017.

“It’s hard to see that refinery utilization can increase that much,” said Gary Simmons, Valero’s chief commercial officer. “We’ve been at this 93% utilization rate; typically you can’t sustain it for long periods of time.”

The U.S. ban on Russian imports has left refiners in the northeastern United States short of the raw materials needed to make fuel. Phillips 66 has been operating its 150,000 bpd catalytic cracker at its New Jersey refinery at reduced rates because it cannot source low-sulfur vacuum gas oil, according to two people familiar with the matter. RUSSIAN CAPACITY SLOWING, CHINA RESTRICTS EXPORTS

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Russia has slowed about 30% of its refining capacity due to sanctions, according to Reuters estimates. Outages are currently around 1.5 million bpd, and 1.3 million bpd will likely remain offline through the end of 2022, JP Morgan analysts said.

China, the world’s second-largest refiner, has added several million barrels of capacity over the past decade, but in recent months has cut output due to COVID-19 restrictions and capped exports to curb refining activity as part of an effort to reduce carbon emissions. . China’s throughput fell to 13.1 million bpd in April, the IEA said, from 14.2 million bpd in 2021.

Other countries also do not add to the offer. Eneos Holdings, Japan’s largest refiner, does not plan to reopen recently closed refineries, a spokesman told Reuters.

Some new projects around the world have been affected by delays. A 650,000 bpd refinery in Lagos was due to open by the end of 2022 but is now delayed until the end of 2023. A source with direct knowledge said the refinery has yet to hire a company to carry out commissioning work which will take several months.

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There have been a few reboots. French major TotalEnergies began the process of restarting the 231,000 bpd Donges refinery in April after it closed in December 2020, while a 300,000 bpd complex in Malaysia restarted earlier this month.

SUPPLY GROWTH

Diesel users have been squeezed, especially in agriculture. Ukrainian farmers are short as supplies from Russia and Belarus have been cut off due to the war.

Sri Lanka, which is in the midst of a fuel crisis, closed its only refinery in 2021 for lack of sufficient foreign exchange reserves to buy imported crude. He is looking to reopen this facility because the fuels are even more expensive.

Brazil’s state-owned Petrobras has told the government that importers may not be able to obtain US diesel for tractors and other farm equipment to harvest crops in one of the world’s largest agricultural producers.

“If refineries in the United States are damaged during hurricane season, or if anything else contributes to the market tightening, we could be in big trouble,” said a Brazilian refining official.

(Reporting by Laura Sanicola; additional reporting by Florence Tan in Singapore, Ron Bousso in London, Yuka Obayashi in Tokyo, Sabrina Valle in Houston, Julia Payne in Lagos and Uditha Jayasinghe in Colombo, Sri Lanka; Editing by David Gregorio)

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