(Bloomberg) — The war in Ukraine is strengthening the role of Asia and the Middle East as the world’s main providers of fuels like diesel and gasoline which are crucial to the global economy.
As Europe and the US seek to cut off their dependence on Russian petroleum products, they are facing a shortage of supplies at home. That’s opening opportunities for mega-refineries in places like China and Kuwait to flood the market with fuel.
“By turning their back on Russian oil products, Europe and the US are increasing their dependence on long-haul barrels from the Middle East and Asia,” said Eugene Lindell, head of refined products at industry consultant FGE, based in London.
Russia’s invasion is creating a greater disparity between the two regions after Western nations significantly cut refining capacity in recent years, while the other side of the world has been expanding.
Western markets including the Americas and Europe shut down a net 2.4 million barrels a day of refining capacity in the last three years, while the Middle East and Asia added 2.5 million barrels, according to FGE.
That gap is expected to widen. About 8 million barrels a day of new refining capacity is set to come online in the next three years, with Asia adding the most and Europe the least, according to estimates by Rystad Energy.
“We will see Asia and the Middle East increasingly becoming the fuel suppliers of the world,” said Mukesh Sahdev, head of downstream practice for Rystad. East-West flows of refinery products “will become more structural,” he added.
The seismic shift in the global refining industry was hastened during the pandemic, when older plants were shut as global lockdowns decimated oil demand. China has since brought on larger and more sophisticated refineries to meet the nation’s growing need for oil, while the US and Europe have focused on transitioning away from fossil fuels.
Consumption of fuels such as gasoline and diesel in the US and Europe will mature ahead of Asia, said Victor Shum, vice president of energy consulting for S&P Global Commodity Insights based in Singapore. Many new refinery projects in Asia have also been constructed in view of the region’s growing petrochemical demand, he said.
Russia’s invasion of Ukraine and Western nations’ subsequent sanctions on its fuel supplies took global energy markets by surprise, with fuel security concerns now taking center stage for nations without sufficient refining capacity. In this climate, any refinery outages stemming from worker strikes or unexpected closures will be even more keenly felt across markets.
“European governments and their citizens beset with massive utility bills and soaring inflation are now prioritizing the next few years rather than 2040-2050,” said FGE’s Lindell.
The West is feeling the strain of having fewer refineries. Northwest Europe’s stockpiles of diesel are dwindling, and will reach their lowest at the start of spring, according to a forecast by Wood Mackenzie Ltd., as the European Union looks to cut off seaborne imports of Russian fuel in February.
Meanwhile, rising shortages of diesel and gasoline on the US East Coast are spurring President Joe Biden to consider a mandate requiring oil companies to store more fuel within the country. The gasoline crunch is likely to worsen further toward peak summer driving season, said Rystad’s Sahdev.
Latin America’s become more reliant on imports as several refineries in the Caribbean shuttered, and facilities in Venezuela and Mexico continue to experience significant outages and low run rates, according to John Auers, managing director at RBN Energy.
Mexico is snapping up gasoline from China, where refiners are taking advantage of higher export quotas by running harder and shipping out more. Asia’s exports of transport fuels to the Americas is currently more than double that of year-ago levels, according to data compiled by Bloomberg.
The hauling of petroleum products westward across longer distances is sharply boosting shipping costs and driving a rally in tanker earnings. The volume of fuel transported by sea is 3% higher than averages seen in the last five years, according to Vortexa Ltd. data. That’s led by diesel from Asia and the Middle East to Europe, and volumes may expand as the latter bans Russian supplies, said Serena Huang, lead Asia analyst for Vortexa.
Certainly, the US is still a major exporter of diesel, and efforts to strengthen energy security may help alleviate the shortages, but analysts don’t see the capacity gap narrowing anytime soon.
“We should see a more realistic energy policy going forward, but the plans for a fossil fuel exit are still there,” said FGE’s Lindell. “It is just that the focus is on the short- to medium-term now, rather than the very long term.”
Elizabeth Low and Chunzi Xu–With assistance from Jack Wittels. ©2022 Bloomberg L.P.