By Laura Sanicola and Ron Bousso
NEW YORK/LONDON (Reuters) -Diesel refining margins in both Europe and the United States have surged to all-time highs as strikes at French refineries exacerbate a global shortage of distillate fuels.
Prices for diesel, heating oil and other refined products were already elevated after Russia's invasion of Ukraine and worldwide capacity to produce fuel reduced by the closure of numerous refineries over the last two years.
The French strikes over workers' pay have taken up to 60% of the country's refining capacity - which yields up to 50% diesel - offline, disrupting supplies at almost a third of petrol stations and forcing the government to tap strategic reserves.
Benchmark European diesel refining margins and U.S. distillate margins hit a record high of around $77 a barrel on Monday, although they eased to around $68 on Tuesday. [PRO/E]
The rising diesel margins result from a combination of planned refinery maintenance that has been compounded by the French strikes, said Koen Wessels, lead oil products analyst at consultancy Energy Aspects.
"Every day the strikes drag on, the more balances tighten and hence the chance of a sharp downward correction in cracks once supply returns wanes," Wessels said.
The strikes in France are merely a part of a larger problem globally, however, as worldwide refining capacity fell in 2020 and 2021 by a total of 3.8 million barrels per day, according to a new report from the International Energy Forum. In addition, few new facilities are being planned due to expectations that energy transition efforts would limit growth in oil demand.
"Any unexpected, prolonged refinery outage could cause high and volatile prices," the IEF said.
Europe, which imports around one third of its diesel demand, was already struggling with supply as buyers shunned fuel from major supplier Russia ahead of sanctions banning the country's oil products from February.
The French government said on Tuesday it stands ready to intervene to break the deadlock, which has dragged on for weeks.
Russia remains the largest diesel exporter to Europe in September, accounting for 31% of a total of 2.9 million tonnes, according to Refinitiv data.
U.S. INVENTORY PRESSURE
In the United States, political pressure is mounting for refiners to increase domestic inventories in the northeast, which are near multi-decade lows, ahead of winter.
Home heating oil prices are up 56% to nearly $5 per gallon from October 2019 levels, according to the Energy Information Administration.
The largest U.S. oil trade groups last week urged top officials in the Biden administration to stop considering limiting fuel exports as a way to lower consumer prices.
U.S exports of distillate fuel reached a record 1.76 million barrels in September, with more than 633,000 barrels of diesel sent to Northwestern (NASDAQ:NWE) Europe, according to Refinitiv data.
The idea of limiting U.S. fuel exports was largely dismissed as unlikely by the oil industry when it first came up months ago, but the latest pushback reflects increasing concern that the administration could push ahead with restrictions.
The strikes are having a ripple effect across the globe. A key spread between Singapore-based gasoil swaps and ICE (NYSE:ICE) low sulfur gasoil futures contract fell to minus $231.93 a ton by Tuesday's close, the widest since March, Refinitiv data showed. That spread encourages traders to ship diesel from Asia into Europe.