Europe faces the risk of an extremely difficult winter as energy instability, soaring oil procurement costs, and shrinking refinery profitability create an explosive mix for the fuel market. The European Commission warns that high energy prices threaten to exacerbate the cost-of-living crisis, while pressures on European refineries intensify fears of production curbs and further supply tightening. The picture in international oil markets is growing increasingly complex. Oil prices and tanker freight rates have surged, dramatically increasing costs for refineries at a time when the prices of the products they produce are not rising sufficiently to offset these burdens. The result is a drastic contraction in profit margins, with some facilities potentially examining operational cuts if conditions deteriorate further. At the same time, uncertainty surrounding energy flows through the Strait of Hormuz—through which a critical share of global oil and gas trade passes—complicates forecasts regarding price trajectories and supply adequacy.
Commission: "Very, very difficult winter"
The European Union is heading toward a "very, very difficult winter," warned European Commission energy spokesperson Anna-Kaisa Itkonen, pointing out that rising energy prices threaten to further inflate the costs of basic goods and services. She clarified that the European Union does not currently face a security of supply problem. However, she characterized the situation in energy markets as "very volatile" and "very unpredictable," underlining that there is no clear picture of what might happen and when in Hormuz. "We have no visibility, for example, regarding what and when will happen in the Strait of Hormuz, where 20% of oil and gas has been obstructed for many, many months," Itkonen stated. The uncertainty surrounding this specific maritime chokepoint adds yet another risk factor to an already pressured market. Any development affecting international energy flows can impact procurement costs, fuel prices, and ultimately the financial burden on households and businesses in Europe. The Commission's warning came alongside its proposal to postpone by one year the reporting requirements regarding methane emissions on oil and gas imports, following pressure from France and the US.
Refinery profit margins collapse
Simultaneously, the profitability of European facilities has dropped dramatically, sparking concerns over potential production cuts and subsequent market shortages precisely as Europe confronts high prices for refined products. The surge in physical crude oil prices, combined with supertanker charter costs reaching record levels, has significantly increased raw material expenses. Concurrently, the prices of certain products manufactured in refineries, such as gasoline and naphtha, have not risen enough to cover cost increases. LSEG data is dramatic. Refining margins in northwestern Europe plummeted from $54 per barrel in early September to as low as -$11 on October 5. Despite the subsequent recovery, they stood at just $3 per barrel at the time of recording. These are the so-called crack spreads, meaning margins resulting from the difference between the value of produced petroleum products and the cost of crude oil used as feedstock. When these contract excessively, operating a facility becomes less economically viable. The International Energy Agency (IEA), in its report on Wednesday, warned that overwhelming crude procurement and transport costs have crushed refinery profit margins in Europe and Asia in recent weeks.
Production cuts on the table
Further deterioration in profitability could lead certain refineries in Europe and Asia to curb their operations, with potential consequences for fuel supplies in the global market. According to the IEA, if profit margins worsen further, less competitive units may proceed with economic run cuts before the end of the year, increasing market tightness. Pressures are particularly intense on lower-margin products, such as naphtha and high-sulfur fuel oil. The margins for these products have sunk deeper into negative territory as demand has failed to keep pace with rising crude costs. Simultaneously, gasoline profit margins crossed into negative territory in late September. Benedict George from Argus described the situation as extremely pressing, pointing out that margins are now very tight and companies do not know how they will move in the coming weeks. As he explained, if margins remain negative for a week, refineries will likely not change strategy. If, however, the situation persists for three weeks or more, their behavior may change. So far, facilities have not curtailed operations due to this specific pressure. However, the probability of production cuts remains open as long as profit margins continue to hover at extremely low levels.
Record levels in costs
Concerns over oil supplies from the Persian Gulf, as well as the halt in flows via Saudi Arabia's East-West pipeline, have played a significant role in worsening the situation. These concerns led refineries last month to pay high premiums above benchmark prices, securing crude oil deliveries for the period ahead. Subsequently, however, both physical crude prices and transport costs increased even further, burdening corporate balance sheets. Indicative is the trajectory of Dated Brent, the benchmark price for physical oil deliveries in a timeframe of roughly 10 to 30 days. This specific price rose by more than 13% within a month, while first-month futures contracts advanced by just 1.2% over the same period. This divergence, combined with the high premiums paid by buyers, has driven crude procurement costs at refinery gates to record levels. The problem is therefore not limited to the direction of international oil prices. Corporate expenses also depend on actual delivery prices, additional sums required to secure cargoes, and transport expenditures.
Pressure on the diesel market
The decline in refining margins is recorded during a period when international diesel markets already exhibit heightened tightness. On Friday, US President Donald Trump announced an agreement with Russia regarding the release of diesel quantities onto international markets. However, analysts estimate this specific move will have limited market impact and is not expected to fundamentally reverse the pressures. Refineries convert crude oil into a broad spectrum of products, from LPG and gasoline to heating oil, jet fuel, fuel oil, and asphalt. Although diesel and jet fuel prices have risen significantly this year, facilities possess limited flexibility regarding the volume of each product they can yield from a barrel of crude. This means that even when a specific fuel offers a higher profit margin, refineries cannot indefinitely increase its production at the expense of other products. This limits their ability to react to fluctuations in demand and prices.
US refineries in an advantageous position
The pressures faced by European and Asian facilities stand in sharp contrast to conditions prevailing in the United States. American refineries can utilize domestic crude oil and have consequently not been impacted to the same degree by the surge in freight rates, which is linked to the shortage of available tankers during wartime. As a result, their profits are projected to increase more than fourfold, according to data cited in the IEA's analysis. However, the improved profitability of American facilities is not sufficient to offset the disincentives confronting refineries in other regions of the world. The IEA estimates that global refinery runs will decline in October to a seasonal low of 81.3 million barrels per day. This means increased crude processing in the US is not expected to fully neutralize the pressure exerted on output by European and Asian units.
High freight rates impede the transport of cheaper fuels
An additional problem is the growing fragmentation of the international petroleum products market. High freight rates make it more expensive to transport fuels from regions where prices are lower to markets where demand and prices are higher. Under normal conditions, price differentials between regions create incentives for trade flows that help balance the market. When transport costs increase excessively, however, moving cargoes becomes less lucrative, even if a clear price gap exists. Arne Rasmussen, chief analyst at Global Risk Management, described the phenomenon as a situation where cheaper fuels do not necessarily head to the markets that need them most due to transport costs. A characteristic example is gasoil, which is cheaper in Asia than in Europe. Under normal conditions, this differential could encourage the transport of quantities to the European market. However, exceptionally high tanker charter rates restrict this capability. The result is that the redistribution of available fuels internationally is hindered, exacerbating pressures on markets facing higher prices.
Fears of a new wave of inflation
The Commission's warning regarding an extremely difficult winter coincides, therefore, with a period of intense pressure on the European refining market. Rising crude and transport costs, compressed profit margins, and the likelihood of production cuts create additional risks for the fuel market. If these conditions persist, the supply of certain petroleum products could be restricted further, while increased procurement and transport costs may sustain upward pressure on prices. In such a scenario, the fallout could extend to the broader economy, burdening businesses and households.
www.bankingnews.gr
Σχόλια αναγνωστών