Friday, December 02, 2022

Why is there a global oil refining crunch?

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Drivers around the world are feeling the pain at the pump with skyrocketing fuel prices rising and costs rising to heat buildings, generate power and run industries. Prices were raised before Russia invaded Ukraine on February 24. But since mid-March, fuel costs have risen while crude oil prices have risen only moderately. Many of the reasons are a lack of sufficient refining capacity to process crude oil into petrol and diesel to meet the high world demand. How much can the world refineries produce daily? In total, there is enough capacity to refine about 100 million barrels of oil per day, according to the International Energy Agency (IEA), but about 20% of that capacity is not usable. Much of that useless capacity is in Latin America and other places where there is a lack of investment. This leaves somewhere around 82 million to 83 million bpd in projected capacity. How many refineries have closed? The refining industry estimates that the world has lost 3.3 million barrels of daily refining capacity since the beginning of 2020. About a third of these losses have occurred in the United States, with the rest in Russia, China and Europe. Demand for fuel plummeted early in the pandemic when restrictions and remote work were widespread. Prior to that, refining capacity had declined for at least three decades in no year. Will refinement pick up? Global refining capacity will expand by 1 million bpd per day in 2022 and 1.6 million bpd in 2023. How much has refining decreased since before the pandemic? In April, 78 million barrels were processed daily, sharply lower than the pre-pandemic average of 82.1 million bpd. The IEA expects refining to recover to 81.9 million bpd during the summer as Chinese refineries return online. Where is most of the refining capacity offline, and why? The United States, China, Russia and Europe all operate lower capacity refineries than before the pandemic. US refineries have closed nearly 1 million bpd capacity since 2019 for various reasons. Nearly 30% of Russia’s refining capacity was empty in May, sources told Reuters. Many Western nations reject Russian fuel. China has the most extra refining capacity. Exports of refined products are only allowed under official quotas, granted primarily to large state-owned refining companies and not to smaller independent companies that own much of China’s savings capacity. As of last week, run rates at China’s state – aided refineries averaged about 71.3% and independent refineries were about 65.5%. It was higher than earlier in the year, but by historical standards low. What else contributes to high prices? The cost of transporting products on vessels overseas has risen due to high world demand, as well as sanctions on Russian vessels. In Europe, refineries are constrained by high natural gas prices, which drive their operations. Some refineries also rely on vacuum gasoline as an intermediate fuel. Loss of Russian vacuum gasoline oil has prevented certain refineries from restarting certain gasoline-producing units. Who benefits from the current situation? Refineries, especially those that export a lot of fuel to other countries, such as American refineries. Global fuel shortages have pushed refining margins to historic highs, with a key spread of close to $ 60 a barrel. This has driven huge profits for the US-based Valero and India-based Reliance Industries. India, which refines more than 5 million bpd, according to the IEA, imports cheap Russian crude oil for domestic use and export. It is expected to increase output by the end of the year by 450,000, the IEA said. More refining capacity will be available online in the Middle East and Asia to meet the growing demand.

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