Refining margins, fuel costs surge on fallout from Russian invasion

Source: By Stephanie Kelly, Reuters • Posted: Wednesday, March 9, 2022

NEW YORK (Reuters) – Refining profits, or margins, from turning crude oil into products such as gasoline and diesel are ballooning, and could surge further after the United States, the world’s top oil consumer, on Tuesday banned all Russian oil imports in retaliation of Moscow’s invasion of Ukraine.

The U.S. ban on the world’s biggest oil exporter of over 7 million barrels per day of crude and petroleum products is expected to make it more difficult for domestic refiners to source the feedstocks needed to make diesel and other products, market participants said.

Until now, Russia’s energy exports had been exempted from international sanctions by most nations. The U.S. ban, announced by President Joseph Biden, was joined by Britain, which said it would phase out oil imports by the end of the year.

The move against Russian oil pressured the already tightly supplied market even more. Since the Feb. 24 invasion, global benchmark Brent crude futures have soared about 35% to hit $133.15 a barrel on Tuesday, while U.S. crude has surged 40% to $129.44 a barrel. [O/R]

The market’s stress over supplies can be seen in the time spreads that show buyers are paying dearly to source fuel now, lest it become unavailable. For example, the price for U.S. gasoline futures for delivery now versus in six months has surged to record highs, according to data from Refinitiv Eikon.

“A market that is tight on both refined product inventories and crude stocks, globally, is a difficult one to solve without prices moving meaningfully higher,” said Michael Tran at RBC Capital Markets.

European benchmark diesel’s six-month spread surged to record-high backwardation of $509.75 a tonne on Tuesday, due to fears of disruptions to Russian supplies.

The United States is not a big importer of Russian crude, but it imported about 350,000 barrels of unfinished oils every day in 2021, according to U.S. Energy Department figures.

Those products are used in refining to be turned into fuels for general use, of which Russia is a big supplier. They include unfinished oils such as naphtha, some types of fuel oil, and feedstock for refiners of heavy crude.

Those products are crucial for processing into other refined goods that the United States exports, largely to South America and Mexico.

Margins to produce distillates in the United States, such as heating oil and diesel climbed as high as $63.26 a barrel on Tuesday, their highest since April 2020, when crude futures turned negative during the coronavirus pandemic.

U.S. gasoline margins rose to $36.39 a barrel on Monday, also its highest since April 2020, but since edged down to around $31 per barrel on Tuesday.

The 3-2-1 crack spread, a proxy for refining margins, surged to $41.19 a barrel on Tuesday, the highest since at least a year ago, according to available data from Refinitiv Eikon.

Reporting by Stephanie Kelly; additional reporting by Ahmad Ghaddar; Editing by Marguerita Choy