U.S. refiners are operating at near-record utilization rates, prioritizing diesel production due to unprecedented profit margins. The crude-to-fuel product spread, a key metric for U.S. refiner profitability, recently reached a record high of nearly $70 a barrel. Similarly, European diesel profit margins surged to a record $66.25 a barrel following Russia's ban on diesel exports. Analysts such as Neil Crosby of Sparta Commodities and Raul Calzada of Energy Aspects confirm that refiners are running at full tilt, with little room to further increase output in the third quarter.
The global diesel supply is exceptionally tight, exacerbated by several geopolitical events. Ukraine's drone attacks on Russian refineries led to Russia's diesel export ban. The ongoing conflict between the U.S. and Iran has disrupted oil exports from the Strait of Hormuz and also threatens to affect Asian refiners' August output plans. Furthermore, Yemen's Iran-aligned Houthis have threatened to block Saudi Arabian exports from the Red Sea, which could force millions of barrels per day of Saudi crude to take longer routes, further constricting product supply.
This tightening supply has led to significant price increases. The U.S. national average retail diesel price on Monday reached $5.044 a gallon, marking a substantial jump. The benchmark diesel price for fuel surcharges experienced its second-largest increase since the war began, rising by $0.338 per gallon to $5.134 per gallon. Jeff Currie, a former head of commodity research at Goldman Sachs, noted that current crack spreads, which are the profit margins from turning crude into refined products, are at historical highs, indicating a fundamental shortage rather than just a deficit.
While Asian refiners were initially expected to lead a recovery in global fuel production, the ongoing conflicts and disruptions in crude supply have made this recovery uncertain. Wood Mackenzie had projected Asian throughput to reach 30.37 million barrels per day in August. Globally, the International Energy Agency estimated refiners would process 81.6 million barrels per day in the third quarter, a 4% increase from the second quarter but still 4% lower than the previous year. The tight supply situation means that profit margins for refiners are expected to remain high, with some analysts suggesting that prices need to increase further to curb end-user demand.
