Global refinery margins lose steam as Russian oil finds new outlets

Global diesel margins have slumped by about half since February, dragging on refiners' profits, as Russian exports continue despite sanctions, helping output from China and India reach all-time highs in March.

Western sanctions and price caps on Russian crude and oil products introduced in December and February had been expected to tighten oil supplies globally.

However, Russia continues to ship out low-cost oil, enabling its biggest clients – India and China – to boost their refining output and exports. Russian oil products, meanwhile, are being sent in high volumes to oil hubs to be stored and re-exported worldwide.

In addition, several new refining complexes are coming online this year in the Middle East and China, churning out more oil products for export and further depressing refining margins.

India's Reliance Industries (RELI.NS), operator of the world's largest refining complex, said in its earnings call on Friday gasoil margins dropped as Russian diesel supplies have remained firm, while an unusually mild winter in Europe led to a build-up in inventories.

Demand for gasoil to replace natural gas in power generation has also fallen after spot liquefied natural gas (LNG) prices eased from all-time highs, the company said.

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Benchmark European diesel barge refining margins drifted to their lowest since February 2022 last week to about $13.70 a barrel, according to Reuters assessments, pressured by high import volumes and the restart of French refineries after labour-related strikes.

Similarly, Asian gasoil margins have fallen by 31% in April to the lowest since January 2022 at about $14 a barrel last week because of high inventories and as the arbitrage window to Europe has been shut for months.

Profit on processing a barrel of Brent crude at a typical European refinery has plunged by about 71% to the lowest since January last year to $3.56 a barrel in April, while refining profit margins in Asia are down by around 57% to $2.54 a barrel in the month. ,

US GASOLINE MARGINS FIRM

In the US, distillate demand is quite weak and that is corroborated by a lot of macroeconomic indicators including industrial production that are softening, said Mathew Blair, refining analyst at energy research firm Tudor, Pickering, Holt & Co.

However, US gasoline margins are firm ahead of summer driving season and low inventories, supporting overall refining margins against West Texas Intermediate crude at around $21 a barrel, Refinitiv data showed.

Gasoline stocks rose unexpectedly last week for the first time in eight weeks, but are still 9.9 million barrels below the 2015-2019 average and 8.8 million barrels below last year's levels, energy consultancy FGE said.

In Asia, refiners were raising gasoline production and trimming diesel to improve their margins. Higher gasoline output and increased exports from China could narrow the region's deficit for the motor fuel month-on-month in May, FGE added in a note dated 21 April.

Likewise, benchmark European gasoline margins are under pressure from a sharp fall in demand for cargoes from key markets in West Africa, even as exports on the transatlantic route recover from last month.

Northwest European shipments so far in April on the two routes stand at 1.27 million tonnes, down from the 1.79 million tonnes exported last month and well under the 1.84 million exported the same time last year, Refinitiv data showed.

Russia stepped up shipments of the motor fuel to African countries after the European Union banned Russian products on 5 February. Also, exports from the Netherlands to low income countries including in Africa fell after new Dutch regulations on standards for fuel blends started on 1 April.